BOSTON (S&P Global Ratings) May 2, 2018–In March 2018, the Government Accounting Standards Board (GASB) released Statement No. 88, new accounting guidelines that detail disclosure requirements for a variety of financial instruments.
BOSTON (S&P Global Ratings) May 2, 2018–In March 2018, the Government Accounting Standards Board (GASB) released Statement No. 88, new accounting guidelines that detail disclosure requirements for a variety of financial instruments.
WASHINGTON – The Municipal Securities Rulemaking Board, seeking comment on various initiatives and potential guidance, wants feedback on “pennying” or “last look” practices by dealers, and how they may reduce market liquidity.
MSRB president Lynnette Kelly said Monday that the board agreed at a meeting last week to seek public comment on potential rule updates and interpretations on several market practices.
Pennying 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, instead marginally outbids the high bid and buys the bonds for the dealer’s own account.
Market participants will be asked to comment on draft interpretive guidance for dealers that would clarify existing regulations on the practice. The MSRB raised concerns about pennying in a letter to the Securities and Exchange Commission in October.
The MSRB has previously released guidance warning dealers against putting out a bid-wanted solely for the purpose of price discovery so that they can buy the bonds for their own accounts. Pennying was one of two market practices the MSRB said it was concerned about in last year’s letter to the SEC’s Investor Advocate.
While the practice is beneficial to the retail customer in the short term, Kelly said Monday that the MSRB remains concerned about the broader implications of the practice.
“If the practice is widespread, that will disincentivize other firms to bid,” she said. “It’s possible that this practice could negatively impact liquidity.”
The board also agreed to publish a request for comment on the merits of any potential changes to 2012 guidance on its Rule G-17 on fair dealing covering duties owed by dealers to issuers when underwriting municipal securities. The guidance laid out a variety of disclosures underwriters are supposed to make to issuers at the beginning of a transaction, including the disclosure that underwriters are not fiduciaries and not required to act in the best interests of issuers. Kelly said the disclosures have largely become boilerplate and extremely lengthy, and that there is probably a lot of “room for improvement” in that practice.
“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,” Kelly said.
The board also discussed other retrospective reviews, including potential guidance or uniform practices for underwriters related to the dissemination of information about new bond issues and refunding transactions.
The board approved proposed amendments to its Rule G-3 on professional qualification requirements and to Rule A-16 on examination fees, related to 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.
The board also discussed some current topics, such as the fast-approaching effectiveness of new markup disclosure requirements on May 14, and the SEC’s proposal earlier this month to require a broker-dealer to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer. Kelly said discussions about that proposal, known as Regulation Best Interest, were “very preliminary” but could have implications for the MSRB’s suitability rule if the SEC were to move forward with the proposal.
The next MSRB board meeting is scheduled for July 18-19.
By Kyle Glazier
BY SOURCEMEDIA | MUNICIPAL | 04/30/18 07:11 PM EDT
A decade ago, Time.com celebrated the “50 Best Websites of 2008.” About a third of the sites are now defunct, unable to keep up with the changing tastes of online consumers. The municipal market’s most essential website made its debut in 2008, and while it didn’t make Time’s list, it continues to make a profound impact on market transparency. As the Electronic Municipal Market Access website, known as EMMA®, enters its second decade, the website will soon feature a series of investor-focused enhancements, including a streamlined design and more intuitive navigation.
The Municipal Securities Rulemaking Board (MSRB) created the EMMA website in 2008 to serve as a centralized, online source of information that would empower investors to make independent and informed decisions about buying and selling municipal bonds. Before EMMA, it was difficult, if not impossible, for an average investor to view and compare the price at which others were trading bonds. What’s more, few investors knew how to track down timely and complete information about the features, risks and characteristics of a municipal bond investment, as the MSRB explores in a new report, Milestones in Municipal Market Transparency.
EMMA proved transformative for the municipal market, earning designation by the Securities and Exchange Commission as the official source for municipal securities market information in 2009. Over time, EMMA became much more than a place for investors to learn about particular municipal bonds. Municipal bond issuers began to recognize the value of EMMA for exploring how and when other state and local governments were funding their capital needs, significantly broadening their perspective on their own financing options and timing. Meanwhile, EMMA has provided municipal securities dealers, municipal advisors, bond lawyers and other market participants – whose direct experience may have been previously limited to particular regions or types of transactions – the ability to access information about other localities, deal structures and investor demand.
Over the last decade, the MSRB has continued to integrate more market-wide tools on EMMA, from municipal market yield curves and indices, to a calendar of bond issues showing the size, date and purpose of upcoming bond offerings. The navigational improvements to be unveiled on EMMA next week help spotlight these interactive tools for evaluating municipal market trends, and are informed by extensive user experience research and input from stakeholders.
To help investors drill down into the deep well of information about specific bonds and their issuers, EMMA’s homepage will provide direct access to an intuitive map-based search. Information about each security in a bond issue will be clearly presented on individual security-specific pages, which will display interactive graphs of trade prices and yields and a searchable listing of important disclosure documents. Effective May 14, 2018, many investors will receive a direct link to this security-specific page on their trade confirmations under new mark-up disclosure rules designed to enhance transparency of pricing. For first-time visitors to EMMA, the security-specific page will include a transparent overlay highlighting key information and tools to facilitate easier navigation.
While the enhancements are aimed at the individual investor’s user experience, 10 years on, EMMA has become an indispensable tool for municipal securities issuers and financial professionals as well. The next phase of EMMA enhancements will focus on improvements for issuers, including an improved submission process for disclosure filings. A third phase will address the utility of the website for municipal industry professionals, particularly advanced search functionality.
The MSRB remains committed to assessing the evolving information needs of municipal market participants and exploring new ideas and technologies to ensure the EMMA website stands the test of time and continues to support transparency in the municipal market for decades to come.
The Bond Buyer
By Lynnette Kelly
April 23, 2018
Lynnette Kelly is President of the Municipal Securities Rulemaking Board, the self-regulatory organization that operates the Electronic Municipal Market Access (EMMA®) website at emma.msrb.org.
The Municipal Securities Rule Making Board is making its EMMA municipal bond information website more user-friendly today.
EMMA improvements include enhanced displays of information about individual muni bonds, including interactive graphics of trade prices and yields along with a searchable listing of key disclosure documents.
Beginning May 14, when a retail investor receives a trade confirmation for the purchase or sale of a municipal security, the notification will include a link to the EMMA page about the bond.
More and more intuitive information is being included for first time users on the “learn button” on the EMMA site: https://emma.msrb.org/
The changes are part of the agency’s efforts to prioritize the needs of individual investors it was created to serve, MSRB President Lynette Kelly said.
Forbes
by Ted Knutson
APR 30, 2018
Municipal advisors: refresh your knowledge of recordkeeping requirements. Take the MSRB’s new online MuniEdPro® course on Rules G-8 and G-9.
Click here to learn more.
SUMMARY
The MSRB recently announced it is seeking public comment on its on a draft compliance resource about core requirements for municipal advisors related to providing advice on, and making recommendations of, municipal securities transactions or municipal financial products. MSRB Rule G-42, on the duties of non-solicitor municipal advisors, forms the foundation of a comprehensive regulatory framework for municipal advisors developed as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The MSRB’s draft compliance resource is intended to enhance municipal advisors’ understanding and application of Rule G-42.
The BDA has submitted a comment letter to the MSRB concerning municipal market participants and the public on a draft compliance resource about core requirements for municipal advisors related to providing advice on, and making recommendations of, municipal securities transactions or municipal financial products. The final comment letter can be viewed here.
The letter states that while the BDA is appreciative of the opportunity to review and comment on the Notice, the BDA continues to believe that the MSRB should follow a formal interpretative guidance process for these kinds of advisories.
Specifically, the comment letter outlines that the BDA believes that:
Bond Dealers of America
April 20, 2018
On April 19, 2018, the SEC approved by a vote of 4-1 (Commissioner Stein voted no) to advance two proposed rules and an interpretation to address the ”fiduciary” rule/best interest standard. They include the following:
The proposed Regulation Best Interest Rule requires broker-dealers to comply with three specific obligations to meet the best interest standard:
The proposed Form CRS Relationship Summary Rule would:
The SEC is requesting comments for the proposed Investment Adviser Interpretation on:
Addtional Information
BDA Action and Next Steps
The BDA has been closely tracking and actively engaged with the SEC Commissioners and staff on this issue over the last few months.
The Governmental Accounting Standards Board issued GASB Statement No. 88 (the “Statement”) in March 2018. The Statement requires increased disclosure in notes to financial statements of all state and local governments. The new disclosure requirements are effective for reporting periods beginning after June 15, 2018; however, GASB encourages earlier application of the Statement requirements.
GASB’s goal in issuing the Statement is to address stakeholder concerns regarding the current inconsistency in disclosure of essential information related to debt in government financial statements. Of particular concern to stakeholders is the need for more information regarding the terms of direct borrowings and direct placements.
To address those concerns, the Statement defines debt and identifies what debt is subject to disclosure requirements in notes to financial statements:
Definition of Debt:
A liability that arises from a contractual obligation to pay cash (or other assets that may be used in lieu of cash) in one or more payments to settle an amount that is fixed [1] at the date the contractual obligation is established. For disclosure purposes, debt does not include leases, except for contract reported as a financed purchase of the underlying asset, or accounts payable.
The Statement also requires additional areas of summarized information related to debt that are not currently required. The increased disclosure provides users of government financial statements better information about the debt of the governmental entity, specifically the effect of debt on future resource flows of the entity and the consequences that may result in an event of default or termination.
Notes to the Financial Statements:
The Statement requires the following new disclosures in notes to the financial statements:
a) Amount of unused lines of credit
b) Assets pledged as collateral for debt
c) Terms specified in debt agreements related to:
Disclosures regarding direct borrowings and direct placement of debt should be separated from other debt in the notes to the financial statements.
Please see the Statement in full for more information regarding the background and scope of the new requirements.
[1] See full Statement for what amounts are considered fixed at the date the contractual obligation is established.
Public Finance Alert | April.09.2018
Orrick
On April 17, the Financial Industry Regulatory Authority issued Regulatory Notice 18-12, which announces that FINRA will collect a total of $8,346,300 to fund the annual budget of the Governmental Accounting Standards Board (GASB) by collecting $2,086,575 from member firms each calendar quarter beginning in April 2018.
The GASB Accounting Support Fee is collected quarterly from member firms that report trades to the Municipal Securities Rulemaking Board (MSRB). Each member firm’s fee assessment is based on that firm’s part of the total par value of municipal securities transactions reported by all FINRA member firms to the MSRB in the previous quarter. As some firms choose to pass the GASB Accounting Support Fee onto customers engaged in municipal securities transactions, FINRA will continue to provide firms with an estimated fee rate per $1,000 par value. FINRA has estimated that the 2018 GASB Annual Support Fee will be between $0.0024 and $0.0030 per $1,000 par value. Member firms choosing to pass along this fee must ensure that such fees are properly disclosed.
The regulatory notice is available here.
Katten Muchin Rosenman LLP – Janet M. Angstadt
April 20 2018
This year the municipal industry marks the tenth anniversary of the launch of its milestone breakthrough for market transparency — the creation of EMMA or the Electronic Municipal Market Access. It is a reminder of the imperative of modernizing an industry that provides three-quarters of the annual U.S. infrastructure spend and is a $3.7 trillion market.
While commendable in its creation, the transparency provided by EMMA for municipal bond investors existed for other debt markets years before. Other long-held municipal industry practices are overdue for review and change as well.
Toward the top of the list of areas requiring a fresh approach is the way negotiated bond underwriters are paid. Not how much, but by whom. This arcane issue is stuck in decades-old practice long ago abandoned by other markets such as the corporate and securitization bond sectors.
Some background at this point is useful. Once the municipal debt issuer determines the amount of compensation to be paid to the underwriters, there is also a discussion of syndicate rules or the method by which these dollars will be divided among the underwriters.
In the municipal market, the syndicate rule of choice is “net designated.” This approach, selected by many state and local governments, is intended to reward underwriters that deliver actual orders from investors to purchase bonds.
That thought seems initially to have merit, and that may have been so in years past. Why not reward compensation to the underwriters who deliver the orders? But the reality of the market place today, as any institutional investor knows, is that if they place their purchase order with the book running manager as opposed to other firms that are part of the underwriting team, they stand a much better chance of having a larger percentage of their order filled.
That then results in the need for the investor, within syndicate rule guidelines, to “designate” other underwriters a portion of the fees associated with its order. Said clearly, the investor decides which underwriter receives the sales credit or takedown monies associated with the controllable “co-managed designation” related to their order rather than the issuing client.
It is a lingering myth in the municipal market that the discretionary co-manager designations, meaning amounts available to designate above and beyond an issuer’s prescribed requirements, are highly correlated to the co-managers’ sales effort on the particular issue being sold.
In reality, institutional investors weigh multiple factors in what is typically a thoughtful and defensible co-manager remuneration methodology. The objective criteria forming the assessment may include such items as an evaluation of the underwriter as a liquidity provider, generation of relevant macro/micro economic research, provision of credit facilities or other financing vehicles, and the level of filling bond orders from other issues when serving as book-running senior manager.
The fact is discretionary co-manager designation dollars are deployed in a manner representative of the totality of the relationship between the dealer and the institutional investor, and where that relationship falls within the given institutional investor’s determined hierarchy of services. This approach is accepted to the point that if an investor was to have overcompensated a dealer based on a recent set of transactions, that investor would likely recalibrate on upcoming transactions to maintain alignment with the established hierarchy.
But to repeat, some issuing clients may be under the mistaken notion that these designations by institutional investors — monies paid to underwriters from their bond issue — are related solely to the sales efforts on their transaction. In most circumstances, it does not or, at best, is only partially so.
Further, the net designated syndication rule may be providing compensation to an underwriter who may or may not be providing liquidity on that issuers’ bonds in the secondary market–a service typically useful to the especially active issuers of debt–but may not be appropriately weighed in the determination of designations by the institutional investor as it relates to a given issuer.
Other markets migrated away from this net-designated approach long ago to a syndicate rule equivalent to “group net” in the municipal market. This option leaves the allocation of underwriting revenues firmly in the hands of the debt manager for the issuing client.
In the parlance of the business, this is a “pot” transaction where all revenues from the sale of securities are pooled and divided among the underwriters by the issuing client representative. Consequently, the issuer, not the institutional investors, determines how much and why a given underwriter is paid.
This approach has the additional benefit of better synching underwriter compensation with the risk allocation the issuer assigns to each member of the underwriting syndicate. Too often, co-managers have a greater risk percentage than the proportional revenues they ultimately receive.
Note that the adoption of this alternative method of distributing underwriting compensation requires no change in federal, state or local law or regulation. It is completely in the hands of the debt issuers’ staff and advisors.
Currently, debt managers widely opt for the net designated approach of underwriter compensation but are able to make the change to the group net alternative with relative bureaucratic ease. It is time that they do so.
The net designated syndication rule is one whose time has passed. The municipal market should modernize, following the lead of other markets as to how issuer monies from its bond issues are paid to underwriters.
The Bond Buyer
By Chris Hamel
April 20, 2018
The MSRB published an issue brief outlining the regulatory framework for swaps that may be commonly used by municipal securities issuers. Publication of the brief was partly a response to the Tax Cuts and Jobs Act of 2017, which eliminated tax-exempt advance refunding bonds as a means to refinance outstanding municipal bonds and has prompted municipal issuers to consider swaps as an alternative.
In the brief, the MSRB reviewed Dodd-Frank Title VII and material CFTC regulations, highlighting the heightened conduct requirements for swap dealers transacting with “special entities,” including municipalities. Specifically, the MSRB described the requirements that establish that a special entity have a “qualified independent representative” or “QIR” and duties (subject to safe harbors) to act in the “best interest” of a special entity when making recommendations. The MSRB detailed regulatory requirements for municipal advisors which will generally apply to QIRs, including exemptions for swap dealers.
The MSRB further highlighted Dodd-Frank requirements that directly or indirectly apply to municipal entities, including documentation requirements. The MSRB stated that it considers ISDA documentation guidance as a tool to reduce the administrative burden of these documentation requirements, noting that they are voluntary and that a municipal end user can choose to negotiate alternative bespoke agreements provided that the resulting terms comply with applicable regulations.
The MSRB’s publication provides a useful orientation for municipalities that may be looking to use swaps for the first time.
by Jeffrey L. Robins
April 12 2018
Cadwalader, Wickersham & Taft LLP
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
On March 9, 2018, the Bond Dealers of America submitted a letter to FINRA in response to Regulatory Notice (18-05) requesting comment on the Application of Certain Rules to Government Securities and to Other Debt Securities More Broadly. You can view our final comment letter here.
The comment letter outlines that:
Background
FINRA is requesting comment on the application of the following rules to government securities, including U.S. Treasury securities for:
In addition, FINRA is requesting comment on the application of FINRA Rule 5320 as well as NASD Rules 1032(f) and 1050 to all debt securities, in addition to government securities.
The FINRA Notice can be found here.
Norwalk, CT, April 2, 2018 — The Governmental Accounting Standards Board (GASB) today released guidance designed to enhance debt-related disclosures in notes to financial statements, including those addressing direct borrowings and direct placements.
Statement No. 88, Certain Disclosures Related to Debt, including Direct Borrowings and Direct Placements, clarifies which liabilities governments should include in their note disclosures related to debt. This Statement requires that all debt disclosures present direct borrowings and direct placements of debt separately from other types of debt. Direct borrowings and direct placements may expose a government to risks that are different from or additional to risks related to other types of debt.
Statement 88 also requires the disclosure of additional essential debt-related information for all types of debt, including:
The full text of Statement 88 and a high-level overview featured in the current issue of GASB Outlook are available on the GASB website, www.gasb.org.
When Congress passed the Tax Cuts and Jobs Act (TCJA) late last year, a much-heralded provision of TCJA was the reduction in the federal corporate income tax rate, from 35 percent to 21 percent. However, that reduction has had unforeseen consequences for the municipal bond industry. The reduction in the tax rate is expected to result in efforts by banks to increase the interest rates charged by banks for current outstanding loans to municipalities and 501(c)(3) tax-exempt organizations. Whether a bank may increase the interest rate on a loan will depend on the language of the loan documents. Even if the loan documents permit the bank to unilaterally increase the interest rate, some banks may be hesitant to do so, as the request may be received poorly, potentially jeopardizing the bank’s ongoing relationship with the borrower.
Due to these concerns and others, there is speculation that banks will revisit their tax-exempt debt portfolios in 2018, scaling back their holdings and purchasing less tax-exempt debt in the future. For municipalities that traditionally have financed their capital needs through bank loans, the pool of available banks for such loans may shrink, with the remaining choices offering less attractive financial terms. Municipalities may also be turned off by the prospect of another bank placement of their debt after receiving notices of interest rate increases on their existing debt due to the passage of the TCJA.
Therefore, some municipalities may be considering a public offering of bonds after being out of the market for a few years. While the basics of a municipal bond transaction have not changed, a municipality that hasn’t been in the market for a few years should expect to see some differences in how the transaction unfolds. Municipalities should anticipate seeing a heightened emphasis by the underwriter on confirming the municipality has met its continuing disclosure undertaking responsibilities and is able to continue to meet those responsibilities in the future.
Municipal bonds are regulated by the U.S. Securities and Exchange Commission (SEC) and the Municipal Securities Rulemaking Board (MSRB). Under the securities laws, the SEC and the MSRB are prohibited from requiring any issuer of municipal securities to make any filings with the SEC or the MSRB prior to the sale of securities. The MSRB is further limited in its ability to require any municipal issuer to furnish it or any purchaser or prospective purchaser with any documents.
Despite this prohibition, the SEC and the MSRB have been successful in requiring municipal issuers to make specific disclosures and to file documents of various types with the MSRB, through SEC Rule 15c2-12. Under this rule an underwriter of municipal bonds (which may be regulated by the SEC) may not market the bonds unless it obtains a written commitment from the municipal issuer to make periodic disclosure filings. The written commitment of a municipal issuer to make periodic disclosure filings is generally called a “Continuing Disclosure Agreement,” or CDA.
Under the CDA, the municipal issuer agrees to file with the MSRB its financial statements and certain operating data on an annual basis. In addition, under the CDA the issuer agrees to file with the MSRB notices of the occurrence of certain significant events (such as rating changes or defaults on the bonds). The filings are made with an electronic system established by the MSRB called the Electronic Municipal Market Access system, or EMMA .
Municipal issuers that have not undertaken a public offering of bonds in recent years may be familiar with these “basics” of continuing disclosure, but may not be aware of the heightened interest the SEC has shown lately on this issue and ensuring that municipal issuers comply with their continuing disclosure obligations. Many in the industry trace this heightened interest to 2014, with the announcement by the SEC of its Municipalities Continuing Disclosure Cooperation (MCDC) Initiative.
Under MCDC, municipal issuers and underwriters were afforded the opportunity to self-report if they were involved in bond issues in the last five years in which the offering documents for the bonds did not accurately report the issuer’s historic compliance with Rule 15c2-12. For example, a municipal issuer might have chosen to self-report under MCDC if it had failed to disclose in an offering document that it had failed to file annual financial information for a prior bond issue, as required by its CDA. To encourage self-reporting, the SEC offered both a carrot (favorable, standardized settlement terms) and a stick (increased sanctions for unreported violations discovered later).
The MCDC Initiative ended on Sept. 10, 2014, and the SEC subsequently brought enforcement actions against a number of municipal issuers located throughout the country that had self-reported a variety of violations. Municipalities caught up in the enforcement initiative did not face monetary penalties in accordance with the settlement guidelines established by the SEC. Instead, the settlements generally focused on ensuring future compliance with the rule, by requiring issuers to establish appropriate policies and procedures and training regarding continuing disclosure obligations.
The SEC has continued its aggressive enforcement of this issue since the MCDC Initiative ended. In the last few years it has brought actions against issuers and individual officials of issuers, alleging inadequate disclosure in offering documents. For example, in August 2017, the SEC settled charges against the Beaumont Financing Authority of the City of Beaumont, California that the authority made false statements about its prior compliance with its continuing disclosure obligations in five bond offerings. The SEC had discovered the violations in connection with its investigation of municipal issuers and underwriters that had chosen not to participate in the MCDC Initiative.
To settle the charges, the authority had to agree to retain (at the authority’s expense) an independent consultant to review its continuing disclosure policies and procedures and make recommendations for appropriate changes to them. Generally, the authority was required to accept the consultant’s recommendations in order to comply with the settlement. The appointment of an independent consultant would not have been a condition of a settlement under MCDC—if the authority had self-reported.
A municipal issuer entering the bond market in 2018 should expect to see during the underwriting process a heightened level of attention placed on continuing disclosure compliance. Municipalities may be surprised to learn that in connection with the underwriting process they must file one or more notices on EMMA, disclosing that they failed to comply with their continuing disclosure undertakings. In addition, an underwriter may request that a municipality engage a dissemination agent to assume responsibility for future EMMA filings before the underwriter will proceed with a public offering of the municipality’s bonds, if the underwriter has concerns regarding the municipality’s ability to comply with its continuing disclosure responsibilities in the future.
Municipalities that are faced with a request to engage a dissemination agent, or that simply want to lessen the administrative burden placed on their staff in connection with this regulatory mandate, have options when it comes to seeking third-party support. For instance, the attorneys and specialists of the McNees public finance group provide dissemination agent and continuing disclosure support services to municipal issuers, both in connection with an initial public offering of bonds, and on an ongoing basis after the bonds are sold. Contact us to learn more.
By Timothy J. Horstmann and Penny Pollick | April 05, 2018
McNees Wallace & Nurick
Timothy J. Horstmann is a public finance attorney with the law firm of McNees Wallace & Nurick and practices in the firm’s public finance group.
Penny Pollick is a continuing disclosure specialist with the firm and assists municipal issuers with their continuing disclosure obligations to ensure their compliance with Rule 15c2-12. Horstmann can be reached at thorstmann@mcneeslaw.com, and Pollick at ppollick@mcneeslaw.com.
A recent decision out of the federal district court in Nevada, BOKF, NA v. Estes D. Nev. March 2, 2018), addressed the interesting question of whether an indenture trustee for municipal bonds could be compelled to arbitrate bondholder claims in front of the Financial Industry Regulatory Authority (FINRA). The court answered in the affirmative, navigating through a labyrinth of rules of FINRA and the Municipal Securities Rulemaking Board (MSRB). The decision creates precedent in the muni bond world, but because it rests on MSRB regulation, it would not ordinarily extend to trustees for corporate debt instruments.
Background
The Estes case is yet another outgrowth of the misdoings at Lawson Financial Corporation, a now-demised demised municipal bond underwriter that was effectively shuttered by the Securities and Exchange Commission. (See Debt Dialogue, April 2017.) Between 2015 and 2017, the SEC filed complaints against principals of Lawson, Christopher Brogdon and Dwayne Edwards, and issued a cease and desist order against Lawson for fraud and violation of the federal securities laws.
The indenture trustee for the muni bonds underwritten by Lawson was BOKF, N.A., doing business as Bank of Oklahoma, N.A., through its corporate trust department. The SEC also filed complaints against BOKF and the former head of its corporate trust department, Marrien Neilson, for their involvement in the Lawson schemes, with BOKF entering into a consent agreement with the SEC over its alleged role as aider and abettor in the fraud.
In June 2017, a group of holders of bonds underwritten by Lawson initiated arbitration against BOKF under FINRA’s Code of Arbitration Procedure (Customer Code; Rule 12000 et seq.), alleging violations by BOKF of the federal securities laws in connection with its service as indenture trustee for the bonds. The bondholders contended that BOKF was subject to FINRA arbitration as a “bank dealer” engaged in municipal securities dealer activities pursuant to the rules of the MSRB.
In November 2017, BOKF brought suit against the bondholders in federal district court seeking a declaration that BOKF was not subject to FINRA arbitration, and also sought related injunctive relief. With the FINRA arbitration set for July 2018, in December 2017, BOKF sought a preliminary injunction enjoining the bondholders from taking any action in furtherance of the arbitration.
The Decision
The court brought the usual principles to bear on BOKF’s preliminary injunction and found that BOKF was unlikely to prevail on the merits.
The court began with the observation that arbitration cannot be compelled absent a contractual basis, and BOKF was not a member of FINRA and not directly subject to its rules. The contractual basis advanced by the bondholders were the rules of the MSRB that import FINRA arbitration procedures. Rule G-35 of MSRB rules provides that “every bank dealer … shall be subject to the [FINRA] Code of Arbitration Procedure … for every claim, dispute or controversy arising out of or in connection with the municipal securities activities of the bank dealer acting in its capacity as such.”
In turn, under the FINRA Code, “customers can compel registered members of FINRA to arbitrate certain disputes even when no written arbitration agreement exists.”
BOKF raised two arguments in its attempt to halt the arbitration proceedings. First, it reasoned that the bondholders were not its “customers” within the meaning of the FINRA Code, such that they lacked standing to commence an arbitration even assuming that the FINRA Code applied to BOKF. Second, BOKF maintained that its corporate trust department was not a “bank dealer” within the contemplation of MSRB Rule G-35. The court rejected both arguments.
Bondholders as “customers” of an indenture trustee
“Customer” is not affirmatively defined in the FINRA Code, but relying on precedent of the Court of Appeals for the Ninth Circuit, the district court held that the term is to be interpreted broadly. The bondholders had, in the court’s view, alleged sufficient circumstances to bring BOKF within the ambit of the “customer” concept, liberally construed. BOKF was indenture trustee, bond registrar, dissemination agent and paying agent. It paid bondholders on their investments and provided bondholders information about their investments. It owed fiduciary duties to bondholders and its fees were paid from the “bondholder’s [sic] investment proceeds, which shows a direct investment relationship even though [the bondholders] did not specifically buy the bonds from BOKF.”
The court therefore found that BOKF was not likely to succeed on its claim that the bondholders were not its “customers.”
The indenture trustee as “bank dealer”
MSRB Rule D-8 defines “bank dealer” as “a municipal securities dealer which is a bank or a separately identifiable department or division of a bank … .” MSRB Rule G-1, in turn, provides that “[a] separately identifiable department or division of a bank … is that unit of the bank which conducts all the activities of the bank relating to the conduct of business as a municipal securities dealer.” Finally, municipal securities dealer activities are defined to include underwriting, trading and sales of municipal securities; financial advisory services in connection with the issuance of municipal securities; processing and clearing activities; related research and investment advice; any other activities involving communication with public investors in municipal securities; and maintenance of related records. BOKF contended that its corporate trust department did not engage in any of these defined activities and therefore was not a “bank dealer.”
Rejecting BOKF’s contention, the court credited the bondholders’ position that BOKF engaged in activities beyond mere ministerial function. Among other things, Ms. Neilson, the former head of BOKF’s corporate trust department, allegedly served as the primary contact person between BOKF, Lawson and the conduit borrowers, and also provided financial advice and consultation regarding the terms, structuring, and timing of the bond offerings. The bondholders also contended that employees within the corporate trust department, including Ms. Neilson, engaged in research activities on behalf of Lawson. The court credited these allegations and found that these functions fell comfortably within the zone of municipal securities dealer activities, as defined.
Other considerations
In rejecting BOKF’s request for preliminary injunction, the court also adverted to what it called “the strong policy in construing the scope of arbitrable issues under FINRA broadly and in favor of arbitration.” The court noted that other courts had held consistently that “forced participation in an arbitration forum that does not have jurisdiction over the dispute is per se irreparable harm.” Here, however, BOKF did not establish that FINRA lacked jurisdiction.
Some Thoughts
Reading the decision, there is some sense that the court bootstrapped its way to the conclusion. Its denial of the requested preliminary injunction was premised in large measure on the as yet unproven allegations of the bondholders. What can be said is that the court seemed convinced by the cumulative weight of the allegations in the various SEC complaints, particularly those against BOKF and the former head of its corporate trust department, indicating that BOKF was much more than a passive administrator in the web of fraud woven by Lawson and its principals.
Putting aside the particulars, the case is a cautionary tale of a municipal indenture trustee being hauled before a FINRA arbitration panel despite the fact that it is not a FINRA member and that it would not ordinarily be regarded as engaging in municipal securities dealer activities. While indenture trustees ordinarily view themselves as administrative creatures acting within the four corners of their indenture, a demand for arbitration would necessarily arise in circumstances where the trustee was acting outside the zone of ministerial function. In the BOKF case, these activities were alleged to have occurred around the time of issuance of the securities, and not down the road when the trustee was pursuing (or not pursuing) remedies after a default. It is unclear therefore whether the rules of the MSRB could be stretched so thin as to reach even post default remedial activities of the trustee. But the warning light is there.
There are no rules in the corporate bonds arena to bind indenture trustees to FINRA arbitration, analogous to MSRB Rule G-35. There would have to be another contractual lever to compel the trustee to appear in a FINRA or other arbitral proceeding. The case nonetheless suggests that where a hook exists to bring a trustee into a retail-friendly arbitration forum, a court may stretch to do so.
Kramer Levin Naftalis & Frankel LLP
by Abbe Dienstag
March 30, 2018
Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today published an issue brief about historical policy issues and additional considerations related to the use of minimum denominations in the sale of municipal securities. The report, intended as a resource for municipal market stakeholders and others, details information drawn from the MSRB’s outreach to diverse market stakeholders on minimum denominations.
Minimum denominations for municipal securities are established at issuance to help target their sale to an appropriate category of investors or reduce administrative costs, among other reasons. The MSRB has no rulemaking authority over issuers, including with respect to the use of minimum denominations. However, to help to ensure that municipal securities dealers observe established minimum denominations, MSRB has since 2002 generally prohibited dealers from effecting a municipal securities transaction with a customer in an amount below the minimum denomination of the issue.
In recent years, industry concerns emerged about the limited nature of two exceptions to MSRB Rule G-15(f), on minimum denominations, that were intended to protect customers who hold positions in securities that are below the minimum denomination of an issue. In 2015, the MSRB began to explore possible revisions to the rule that would have created additional exceptions, but in response to strong commenter opposition and an absence of comments from issuers or their representatives, the MSRB in May 2017 decided not to pursue any amendments. Instead, it engaged in formal outreach with bond issuers, their advisors and counsel, dealers in municipal securities and other market participants to more fully understand their perspectives and policy issues raised in the rulemaking process.
The issue brief includes considerations that may merit further discussion among issuers, dealers and other market participants. While the MSRB does not plan to propose changes to its minimum denomination rule, it is providing this resource to support any efforts by market stakeholders to evaluate market practices regarding the use of minimum denominations, particularly in light of developments in technology, a growing interest in small-denomination municipal bonds and the allocation practices of investment advisers.
Date: March 12, 2018
Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org
Federal Regulatory and Legislative Priorities
FINRA Rule 4210
In 2016, the BDA was successful in getting FINRA and SEC to file a last-minute amendment to the rule that significantly expanded the “gross open position” exception from $2.5 million to $10 million. BDA had advocated for a more expansive gross open position limit throughout the rulemaking and the $10 million level expands the universe of counterparties and trades where the transfer of margin will typically not apply.
More recently, the BDA was supportive of a delayed effective date and lobbied FINRA directly for the delay. In September 2017, the rule was delayed to June 2018.
In 2018, the BDA has met with SEC Chair Clayton and each SEC Commissioner in addition to FINRA CEO Cook and senior counsel advocating for excluding from the rule transactions from the “Covered Agency Securities” definition that do not pose systemic risk, such as specified pools and CMOs; transactions from the “Covered Agency Securities” definition that settle on the next or first good settlement date; and/or allowing dealers to take a capital charge instead of requiring them to enter into margining agreements with customers.
The BDA believes that FINRA should revise the amendments to 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 with money manager accounts, prevent non-FINRA regulated banks from marketing their status as a non-FINRA regulated entity, and still manage any systemic risk. This idea was discussed with Robert Cook and senior FINRA staff in December 2017, and in February 2018, the BDA received word that FINRA is considering this proposal. FINRA has discussed this idea in-depth with BDA member firms, and an update is expected shortly.
Retail Confirmation Disclosure Rules
In the fall of 2017, at the request of Robert Cook of FINRA, a BDA working group submitted an amendment recommendation for the retail confirmation disclosure rules to both FINRA and MSRB. The BDA policy recommendation introduced the concept of “general market liquidity provider” to allow dealers that provide liquidity and offer bonds in support of their network of financial advisors to rebut the presumption that their cost is the best measure of prevailing market price for the purposes of the disclosure. The BDA also continued to advocate for a delay of the rules.
Throughout December 2017, BDA staff continued conversations with FINRA staff, and also reached out to SEC commissioners’ staffs to discuss our concerns in-depth after hearing that SEC commissioners were balking on a delay of the rules.
In January 2018, BDA members met with SEC Chairman Jay Clayton, SEC Commissioner Kara Stein, and senior staff to SEC Commissioner Mike Piwowar in support of a delay of the rule and to make clear to the SEC the numerous compliance problems small firms are facing with vendors, etc. The BDA also explained to the commissioners the “general market liquidity provider” amendment.
The SEC commissioners held their position that the rules should not be delayed. However, the BDA felt that they did leave the door open for an extended timeline without enforcement. During the meeting with Chairman Clayton, he prompted the BDA to draft a “business plan” laying out the framework of steps to be taken if a delay of enforcement were to be granted. The plan BDA presented includes a “conformance period,” in which the regulations would not be enforced if broker-dealers acted in good faith and worked to come into full compliance with the rules by December 31, 2018.
As a follow-up, in March 2018, BDA members met with the two new SEC commissioners, Hester Peirce and Robert Jackson, Jr., regarding the markup rules.
In March 2018, the BDA was notified that regulators are seriously considering the BDA’s conformance period proposal. Currently, the BDA is in communication with member firms, industry groups and regulators to ensure a positive outcome. More information on this issue will be distributed soon.
Municipal Advance Refundings
The BDA is leading the advocacy push for H.R. 5003, legislation that would fully reinstate municipal advance refundings. While disappointed in the elimination of advance refundings in the Tax Cuts and Jobs Act of 2017, the BDA continues to work simultaneously with Capitol Hill, MBFA and the full issuer community and the U.S. Treasury to find a market-based, regulatory no cost solution for municipal bond issuers.
Grassroots lobbying efforts are ongoing with BDA membership contacting their representatives in Washington. Municipal Bond Division Leadership has provided the BDA with advance refunding project data for Ways and Means comments on “expired tax provisions” in March, showing a wide variety of cost savings lost for state and local governments of all sizes. The BDA also plans to host a member fly-in surrounding “Infrastructure Week 2018” to help raise awareness for municipal advance refundings on Capitol Hill this May.
Private-Activity Bonds
In early 2018, the Trump Administration released an infrastructure guideline that would eliminate the AMT provision, provide change-of-use provisions to preserve the tax-exempt status and allow for the advance refunding of PABs. The BDA continues to work with its partners on Capitol Hill to promote these fundamental pillars in any infrastructure package.
The BDA plans to incorporate PABs into the “Infrastructure Week” fly-in this May.
MSRB Rule G-15 Minimum Denomination Rule
As a result of direct lobbying efforts of the BDA, the MSRB withdrew a proposed rule to amend MSRB Rule G-15 for minimum denominations (Proposed and withdrawn MSRB Rule G-49). The withdrawal of the rule took place after a BDA conversation with MSRB Counsel Mike Post that was supported by Dan Deaton from Nixon Peabody. During that call, BDA highlighted that the rule proposal and the existing G-15 framework was harming the marketplace, especially retail investors. After withdrawing the rule, the MSRB sought additional input from the BDA on a conference call with BDA members. The accomplishment is that BDA advocacy resulted in the rule being withdrawn. The BDA educated the MSRB and they appear committed to updating G-15 in a way that would focus the minimum denomination rule on issuances with minimum authorized denominations of $100,000 and above, removing a significant burden on the retail municipal market. Pending regulatory discussions will continue in 2018.
DOL Fiduciary Duty / SEC Best Interest Standard
While the DOL fiduciary rule and exemptions are extremely burdensome, the BDA and dealer firms were successful in getting significant changes included in the final rule. Initially the Best Interest Contract Exemption (BIC) and the Principal Trading Exemption (PTE) excluded a series of assets including municipal bonds, UITs, CDs, and mortgage securities.
At present, the DOL fiduciary rule has been partially implemented; but several sections of the rule have also been delayed by the Trump Administration to examine if DOL or the SEC is best suited to take the lead on this issue. In June 2017, SEC Chairman Jay Clayton requested public comments on how the SEC might best approach a “fiduciary” standard. The BDA met with the Chairman Clayton, Commissioner Stein, and senior staff to Commissioner Piwowar in January 2018 and let them know that BDA will submit comments to the SEC soon.
The BDA supports a “best interest standard” and strongly believes that the standard should fit within the existing broker-dealer regulatory regime.
Review and Withdrawal of IRS Political Subdivision Rule
The IRS political subdivision rule was proposed in 2016. The BDA opposed the proposal. Due to market participant feedback the rule was not approved during the Obama Presidency. The Trump Administration reviewed IRS rule proposals and identified the political subdivision rule as a particularly burdensome rule.
The BDA and MBFA wrote to the IRS confirming that the rule was burdensome, unnecessary, and harmful for economic growth. The IRS repeatedly identified the comments of market participants as a reason why it identified this rule as particularly burdensome. The proposal was withdrawn on October 20, 2017.
SEC Proposes Amendment to 15c2-12 for Bank Loan Disclosure
The BDA supports the disclosure of bank loans and the most effective way to require the disclosure of bank loans would be for the SEC to amend 15c2-12. In 2017, the SEC released a proposed rule to amend 15c2-12 to require the disclosure of bank loans. This proposal is a BDA accomplishment. While the rule is not yet final, the BDA has engaged in direct advocacy with the SEC prior to and after the rule proposal on the subject of bank loans. Discussions are ongoing in 2018.
High Quality Liquid Asset (HQLA) Legislation/Regulation
Working in tandem with state, local and issuer groups, the BDA has supported the introduction and re-introduction in the House and Senate and passage through the House of legislation to define municipal bonds as HQLA under banking liquidity rules.
In early 2018, municipal securities were classified as level 2B HQLA in 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, which also is expected to pass the Senate soon.
SEC Fixed Income Market Structure Committee
In 2017, the BDA recommended four candidates (Craig Noble, Brad Winges, Horace Carter, Mike Marz) for the SEC’s Fixed Income Market Structure Advisory Committee (FIMSAC). The BDA is pleased that Horace Carter (Raymond James) was selected for the committee, as were BDA members Amar Kuchinad, (Trumid Financial) and Richard McVey (MarketAxess). The BDA continues to monitor FIMSAC activities and will look for ways to actively engage the SEC on these topics.
Additional BDA Priorities 2018
PCAOB Exemption Legislation
The BDA is working with other industry participants and trade groups on potential legislation that would exempt privately-held, non-custodial brokers and dealers from the requirement to have a Public Company Accounting Oversight Board (PCAOB)- registered audit.
The PCAOB requirements do not make sense for privately-held, non-custodial firms. The one-size-fits-all PCAOB audit standards that were designed for public companies, and are priced accordingly, have inflicted substantial harm on small businesses around the country.
Currently, the BDA is waiting to see final bill text, and once the legislation is introduced, the BDA plans to actively advocate for it on Capitol Hill.
MSRB Seeks to Establish Rule for Municipal Advisors/Update Dealer Standards on Advertising
The BDA has been active in submitting comments in opposition to the MSRB’s proposed new rule, MSRB Rule G-40, on advertising by municipal advisors, and amendments to MSRB Rule G-21, on advertising by municipal securities dealers.
Most recently, the BDA submitted comments in February 2018 to the SEC in response to the MSRB’s proposed new rule. While the rule is not yet final, the BDA continues to be active in direct advocacy with the SEC prior to the implementation of new advertising standards.
Bank Qualified Debt
The BDA continues to support the reintroduction of the Municipal Bond Market Support Act or inclusion or this Act in an infrastructure package. Bank-qualified debt legislation would increase the annual volume limit for bank-qualified bonds from $10 million to $30 million and index for inflation. Past legislation has also allowed for the use of pooled financings and calculates the volume cap at the issuer, rather than issuance, level. The BDA has lobbied Congress extensively on the bank-qualified issue during the past seven years and we will continue to do so in 2018.
FINRA Government Securities Initiative
In February 2018, FINRA issued a request for comment (Notice 18-05) on the application of various FINRA rules to government securities including U.S. Treasury securities and debt securities. The BDA believes that the application of FINRA rules to government securities will place undue compliance burdens and staffing challenges and opposes the proposal. The BDA is working with its various committees to draft comments in response to FINRA 18-05.
Debt Research
The BDA submitted comments to FINRA in mid-2017 concerning the proposed limited safe harbor from FINRA debt research rules for desk commentary. The letter outlined the belief that the best solution to help facilitate the timely flow of commentary to investment managers would be a clear interpretation of “research report” that demonstrates that the vast majority of desk commentary is not fundamental research. The BDA also asked that if and when FINRA proposes rule text for the safe harbor, it should provide clarity on desk commentary content. The BDA continues to monitor this proposed rule.
Update: Municipal Bonds for America coalition (MBFA)
In February 2017, 385 organizations and individuals signed an advocacy letter, representing nearly all-50 states, to House and Senate leaders urging them to retain the current law status of municipal bonds as they began deliberation on comprehensive tax reform. The MBFA Coalition was extremely active in its advocacy efforts to preserve all tax-exempt financing options for municipal bonds, including PABs and advance refundings, in the Tax Cuts and Jobs Act. In 2018, MBFA Executive Chair Steve Benjamin will become the president of the
U.S. Conference of Mayors, and will further advocate for the tax-exemption in this highly-visible position. The Coalition will continue to educate Congressional leaders and staff members through its Muni Bonds 101 seminars on Capitol Hill, meetings with staff members of influence at the White House, and developing and maintaining its relationship with members of Congress to preserve the tax- exempt status of municipal bonds.
Bond Dealers of America
March 15, 2018
After weeks of debate and discussion over 100 amendments, yesterday the Senate passed a financial reform bill by a vote of 67-31. The Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) makes bipartisan changes to the Dodd-Frank Act that will right-size post-crisis rules that were imposed on small and regional lenders after the global financial crisis.
Important to BDA members, S. 2155 includes a provision 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 rules. BDA has long supported “high-quality liquid asset” (HQLA) provisions like this one.
BDA will send a thank you letter to all the Senators thanking them for the HQLA provision and passage of the bill.
The House passed its version of financial reform legislation, the Financial CHOICE Act (H.R. 10), last June. Both H.R.10 and S. 2155 have a variety of similar provisions, including a type of regulatory off-ramp, however S. 2155 does not roll back Dodd-Frank regulations to the same degree as the CHOICE Act. Because of these differences, it will be challenging for both the House and Senate to conference a bill together and the future of a financial regulatory bill getting signed into law is uncertain.
BDA will continue to keep you updated as financial regulatory reform proposals advance through Congress.
Banks own close to 15% of the municipal bonds outstanding
As municipal bondholders continue their struggle to make sense of last year’s tax legislation, Congress is set to knock down one argument against participating in the $3.8 trillion market.
Investors are expecting the Senate to pass a bipartisan bill that would include municipal debt in the coveted category of high-quality liquid assets as part of a bid to roll back some elements of the Dodd-Frank law put in place after the financial crisis. The proposed legislation would stoke appetite for municipal bonds among banks, steadying a market still reckoning with the recent tax cuts.
“It takes one of leg of the argument against the muni market as it goes through a shake-up,” said John Mousseau, director of fixed-income strategy at Cumberland Advisors.
It was only a few months ago when President Donald Trump’s revamp of the tax code threatened to sink the viability of municipal debt by eliminating private activity bonds and advanced refunding paper, two key pillars of the $3.8 trillion market. That led local governments to issue billions of dollars in bonds in December in order to front-run the tax changes. But since then, municipal bonds have largely recovered.
The bill would put municipal bonds in the company of high-grade corporate paper and government debt in the eyes of financial watchdogs.
Rules elevating corporate bonds above munis in the regulatory environment has been a chip on the shoulder of market participants. The National Association of State Treasurers blamed the absence of municipal debt from the high-quality liquid assets designation, or HQLA, for contributing to higher borrowing costs for local governments.
Regulations mandating banks hold a minimum amount of HQLA to handle market turmoil were designed with the intention of avoiding a repeat of the 2008 financial crisis when banks found much of the investments on their books were difficult to off-load and less creditworthy than they had initially seemed.
On that front, analysts point out municipal debt features a lower default rate than their private-sector peers at every rung of the credit ladder as they are backed by the full taxing authority of local governments. According to a Moody’s historical study stretching from 1970 to 2015, the frequency of defaults among BBB-rated municipal bonds was lower than that of AAA-graded corporate bonds.
“Why wouldn’t you want better credit collateral than you’re getting with existing legislation on corporation debt,” said Mousseau.
Moreover, municipal debt could hold good value for banks with extra cash. The yield difference between municipal bonds and comparable Treasurys have widened, with the tax-free yield on a 10-year municipal bond slipping to around 85% of the taxable yield on a 10-year Treasury TMUBMUSD10Y, +0.00% for most of this year, well below the 95% seen in early 2017. A lower ratio implies munis are cheaper relative to Treasurys.
Though the revamped bank legislation should boost their investment in municipal paper, its unlikely to return Wall Street to their previous role as the linchpin of the market.
Nonetheless, Mousseau says the bill, if passed, is an under-appreciated step that could prove a boon to smaller financial institutions and commercial banks that have few avenues for long-term investments.
In 1975, banks owned close to half of the municipal bonds outstanding. Their share hit a low in 2004, shrinking to 5%, before making a comeback to 15% in 2017 after former President Barack Obama expanded the allowance for banks to qualify for tax exemptions on interest payments, a key appeal of the municipal bond market.
“If individual investor ownership is the bedrock of municipal holdings, then bank ownership is the topsoil,” said Thomas Kozlik, municipal strategist for PNC Capital Markets, in a January note. He added that “bank buying patterns have historically been sensitive to tax reform and government incentives.”
Their role as a backstop against weakening demand for municipal paper has come to the fore in recent years. Bank holdings of municipal paper rose close to $120 billion from 2015 to 2017, even as households sold around $110 billion of municipal bonds, according to the Federal Reserve data.
But some investors are still waiting for the dust to settle from the Republican tax legislation before making up their minds on how much of a boon a renewed Dodd-Frank bill would be for the municipal bond market.
“Right now the market is trying to figure out what bank activity will be as a result of the tax-cut legislation. Banks very well could find relative value elsewhere,” wrote Kozlik.
Market Watch
by Sunny Oh
Published: Mar 9, 2018 2:12 p.m. ET
Interested in earning @CFPBoard or @NASBA continuing education credits?
The MSRB offers CE credits through live and on-demand webinars and online MuniEdPro® courses.
Read about mark-up disclosure implementation, upcoming compliance dates and resources for municipal bond dealers and municipal advisors in the MSRB’s latest Compliance Corner.
Nation’s largest banks would gain incentive to buy more municipal bonds in legislation targeting smaller banks
WASHINGTON—Bipartisan legislation expected to clear the Senate as early as this week has just one provision that is set to directly benefit the nation’s megabanks: a section aimed at making it easier for them to buy state and local bonds.
The provision, championed by Citigroup Inc. and other large banks, would ease a new rule aimed at ensuring banks can raise enough cash during a financial-market meltdown to fund their operations for 30 days, requiring them to hold more cash or securities that are easily salable.
Under federal banking rules approved in 2014, those “high quality liquid assets” included cash, Treasury bonds and corporate debt—but not municipal debt. Banks historically like to hold municipal bonds because of their safety and tax advantages.
The Senate on Tuesday voted 67-32 to formally begin debate on the bill, which primarily benefits small and medium-size banks, easily reaching the 60 votes needed and signaling that the measure has enough support from Democrats to pass by a comfortable margin. The legislation was backed by 16 Democrats and one independent, Maine Sen. Angus King, bucking Massachusetts Sen. Elizabeth Warren and 31 other Democrats who opposed the procedural vote.
Including the municipal-bond provision in the deregulatory bill was a priority for the nation’s biggest banks that buy a lot of municipal securities as investments. A Citi lobbyist recently told a Senate staffer that the firm would be pleased if easing the treatment of municipal debt under the bank-funding rule was the one thing it could accomplish during the current Congress, according to a person familiar with the conversation.
State and local officials have praised the move, saying their securities could suffer if banks begin to shun them.
A Citi spokesman said the bond provision “is supported by a wide array of groups focused on helping cities and states address critical infrastructure needs.”
While the provision is a victory for Citi, the biggest U.S. banks haven’t lobbied extensively on the Senate bill, according to congressional aides. Big firms have spent billions to comply with a gamut of postcrisis rules and generally aren’t eager to tear them down.
Analysts have said changing the rule for municipal products would be a mistake because it would erode the core of a bank-safety rule put in place after the 2010 Dodd-Frank law. While municipal securities have relatively low default rates, they are traded thinly and shouldn’t count as liquid assets, critics say.
“It’s an outrageously bad idea,” said Phillip Swagel, a professor at the University of Maryland who served in the George W. Bush Treasury, characterizing the provision as an implicit federal guarantee of the municipal market. In the next crisis, banks will have trouble selling their municipal securities, freezing up the market for them and requiring the government to step in to backstop it, he predicted.
While lawmakers agreed to include the municipal debt measure, they rebuffed Citi and JPMorgan Chase & Co. efforts to water down a separate postcrisis capital requirement known as the supplementary leverage ratio. That regulation effectively restricts banks from making too many loans without adding new capital, forcing firms to maintain a proportion of capital to fund their assets—including loans, investments and even the collateral clients post on derivatives transactions.
The legislation includes a provision to diminish the leverage ratio in a way that lawmakers say would only benefit financial institutions primarily engaged in “custody services,” in which they hold assets on behalf of other banks. Citi and JPMorgan, global banks that don’t fit the definition but still offer custody services, have argued it is unfair to carve out certain banks from the provision and not others.
“As Congress has sought to make a common sense change to the way capital rules treat custody assets, we have asked that they apply that change to all custody banks to maintain a level playing field in this important business,” a Citi spokesman said.
Senate aides said lawmakers crafted a delicate compromise that can pass the chamber and don’t want to broaden the bill with more provisions helping big banks—which became a target of criticism during the crisis—and risk having the bill fail. “That is not happening,” said one Senate Democratic aide.
Federal Reserve Chairman Jerome Powell said on Feb. 27 that the Fed would prefer that Congress allow regulators to rewrite the leverage ratio rule. Instead, the bill directs regulators to exclude certain assets from the calculation of the leverage ratio for custody banks such as Bank of New York Mellon Corp. and State Street Corp.
The Wall Street Journal
By Andrew Ackerman
Updated March 6, 2018 2:49 p.m. ET
—Ryan Tracy contributed to this article.
Fitch Ratings-New York-09 March 2018: On March 12, 2018 Fitch Ratings will begin inserting a comment into its rating action commentaries (RACs) for credits the agency believes could be affected if a final ruling upholds a recent decision on the interpretation of a section of Chapter 9 of the U.S. bankruptcy code. A Jan. 30, 2018 district court ruling dismissed claims regarding payment of Puerto Rico Highways and Transportation Authority (PRHTA) debt. The ruling states that section 922(d) was included in the code as permission for a municipality to continue paying special revenue obligations if it chooses to do so during bankruptcy rather than as relief for bondholders from the constraints of the code’s automatic stay provisions.
A final ruling in the case that is consistent with this approach would create uncertainty about full and timely payment of special revenue obligations including those of utilities, transportation, and other enterprises of local governments as well as some dedicated tax bonds in the event the related government files for a Chapter 9 bankruptcy. Fitch’s Rating Criteria for Public Sector, Revenue-Supported Debt already consider the influence on enterprise debt of the credit quality of the general government, including common management and service area characteristics as well as legal, financial and operational connections. Restrictions on the use of pledged revenues for other municipal purposes, such as federal law prohibiting diversion of airport revenues to other municipal uses, is another strong credit consideration.
Fitch will insert the following comment in RACs it believes are subject to uncertainty in the event of a final ruling in the PRHTA case that is consistent with the district court ruling:
“A Jan. 30, 2018 district court ruling that dismissed claims regarding payment of Puerto Rico Highways and Transportation Authority debt has raised questions about the scope of protections provided by Chapter 9 to bonds secured by pledged special revenues. Fitch’s rating criteria treat special revenue obligations as independent from the related municipality’s general credit quality. The outcome of the litigation could result in modifications to Fitch’s approach. For more information, see ‘What Investors Want to Know: The Impact of the Puerto Rico Ruling on Special Revenue Debt’ (February 2018).”
Fitch will not include this comment in RACs of bonds rated based on the pledged special revenue definition described in section 902(2)(E) of the code. In these cases, Fitch believes the possibility of a payment interruption due to an automatic stay would remain remote even if the recent ruling were to stand. Fitch sets a high bar to consider tax-supported debt to be secured by pledged special revenues under section 902(2)(E) and thus unaffected by the operating risk of the related municipality. Among the elements required for Fitch to rate such bonds without regard to the government’s issuer rating is a statutory requirement that a governmental official outside the municipality collects and remits the tax revenues to the paying agent, placing the funds outside the control and direction of the municipality.
Fitch has most commonly applied this analysis to bonds issued by school districts in California. In Fitch’s opinion, this structure places the bond security outside the scope of the Puerto Rico decision. The court’s opinion notes that section 922(d) permits third parties to continue to apply special revenues held by them to debtors, free from the automatic stay.
Contact:
Amy Laskey
Managing Director
+1-212-908-0568
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Seth Lehman
Senior Director
+1-212-908-0755
Dennis Pidherny
Managing Director
+1-212-908-0738
Doug Scott
Managing Director
+1-512-215-3725
Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com
Additional information is available on www.fitchratings.com
PHOENIX – A bill that would allow banks to count municipal bonds among their high-quality liquid assets appears to be headed towards eventual passage, potentially alleviating a situation that some market participants have said has hurt demand for munis.
Provisions that would allow banks to treat readily-marketable, investment-grade municipal securities as high-quality liquid assets under federal banking rules is included in S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act sponsored by Sen. Mike Crapo, R-Idaho. The provisions, the same as were included in a previously-introduced bill backed by Sen. Mike Rounds, R-S.D., is a response to rules adopted in 2014 by the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp.
These rules require 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 HQLA to total net cash outflows – to deal with periods of financial stress.
The regulators did not include munis as HQLA under the rule because they felt the securities were not liquid enough. The Fed later amended its rules to include some munis as HQLA but muni market participants said the amendments were still too restrictive and, in any case, would mean little if the other banking regulators did not follow suit.
Banks have emerged as major buyers of munis in recent years, with their holdings rising to about $537 billion in 2016 from about $191 billion in 2006 according to the Municipal Securities Rulemaking Board, a trend many in the market were concerned would be curtailed by the rules.
If passed into law, banks would be able to treat some munis as level 2B HQLA, the same level as for mortgage backed securities. That’s a level down from the level 2A securities the market was hoping munis could belong to, the same level applied to sovereign debt.
The Senate voted March 6 to proceed to debate on the bill, which is broad and touches on not only munis but also mortgage lending and credit standards. The bill has 12 Democrat cosponsors and should be able to pass through the Senate and the House fairly smoothly and be signed into law within a few weeks, according to a source on Capitol Hill.
Emily Brock, director of the Government Finance Officers Association’s federal liaison center, said she is “confident in the bill’s progress.”
“It’s the bottom of the totem pole of what issuers could support,” she said, noting that issuers had really hoped for a level 2A classification. “It’s time to have a bipartisan, bicameral conversation about keeping the bond market strong,” she added.
John Mousseau, executive vice president and director of fixed income at Sarasota, Fla.-based Cumberland Advisors said he believes the bill would be a win for the muni market if it becomes law, because it would help cement banks’ important place as buyers of municipal debt.
The bill is unpopular with the more progressive Senate Democrats, who view it as largely a rollback of the Dodd-Frank provisions enacted in the wake of the 2007/2008 financial crisis rather than the effort to help the smaller regional and community banks that Republicans say the bill will help. Sen. Elizabeth Warren, D-Mass., has criticized her colleagues for supporting the bill and vowed to fight it.
By Kyle Glazier
BY SOURCEMEDIA | MUNICIPAL | 03/08/18 06:52 PM EST
SIFMA provided comments to the Securities and Exchange Commission (SEC) on proposed new rule, MSRB Rule G-40, on advertising by municipal advisors, and amendments to MSRB Rule G-21, on advertising by municipal securities dealers. The MSRB in February 2017 requested industry and public comment on topics including how municipal advisors use advertising and considerations for streamlining and modernizing dealer advertising regulations. Based on commenter feedback, the MSRB revised its draft amendments to Rule G-21 to permit testimonials in dealer advertisements under certain circumstances. Further, the MSRB amended the definition of advertisement under proposed Rule G-40 for advertising by solicitor municipal advisors. Both rules also include guidance that the determination of the number of persons receiving a response to a request for proposal or similar request is determined at the entity level, another change suggested by commenters.
SIFMA provides comments to the Municipal Securities Rulemaking Board’s (MSRB) in response to the Request for Comment on Draft Amendments to MSRB Form G-45 under Rule G-45, on Reporting of Information on Municipal Fund Securities.
The MSRB is proposing to amend Form G-45 to clarify an existing data element and add three additional data elements about Investment Option information in 529 college savings plans and Stephen Beck, Jr., Achieving a Better Life Experience Act of 2014 (ABLE programs).
PHOENIX – How a dealer or municipal advisor responds to a Securities and Exchange Commission examination or enforcement investigation is crucial in determining the outcome, lawyers and an SEC official said Thursday.
The comments were made during a pair of panels focused on topics and trends in securities law and SEC enforcement during the first day of the National Association of Bond Lawyers’ Tax and Securities Law Institute. Panelists spoke about the process and pitfalls of both examinations by the SEC’s Office of Compliance Inspections and Examinations (OCIE) and investigations by the commission’s Enforcement Division’s Public Finance Abuse Unit.
Nadine Sophia Evans, an OCIE attorney, said that the SEC has seen a lot of registration failures among municipal advisors, who are required to be registered with both the SEC and with the Municipal Securities Rulemaking Board if they provide muni bond-related advice to municipal issuers and other entities. Also frequent among MAs are books and records deficiencies and supervisory system shortcomings, Evans said. OCIE’s current MA exam priority is independent MAs that who are not dual-registered as broker-dealers, she said.
When the SEC has seen failures with respect to the fiduciary duty — a duty created for MAs by the Dodd-Frank Act requiring them to put the interests of their municipal issuer clients ahead of their own — Evans said it has typically been related to a failure to disclose a conflict of interest such as a competing business arrangement. Whether a problem is handled by OCIE, the enforcement staff, or the Financial Industry Regulatory Authority, depends on a variety of factors, Evans said.
But several panelists agreed that how the target of an SEC exam or investigation reacts is crucial.
Evans said that OCIE offers registrants a chance to have an “open conversation” with the SEC about the preliminary findings, and that findings of deficiency are kept confidential inside the SEC. But a lawyer at the session said that litigation experience has taught her that there’s “no such thing as an ‘open conversation’ with anyone from the SEC.”
Nadine said that litigation is a different matter from a less formal discussion with OCIE. Andrew Kintzinger, a panelist who practices with Hunton & Williams in Washington D.C., cautioned that statements freely given to OCIE can bite firms later because they can be used against the firms by the Enforcement Division.
“The legal concern is still there,” Kintzinger said. “Voluntary today can be treated as an admission tomorrow.”
In a later panel Kathleen Marcus of Straddling Yocca Carlson & Rauth in Newport Beach, Calif., warned against taking a hostile view of SEC attorneys. SEC lawyers view themselves as regulators rather than as the enemies of the firms they are looking into, she said, and being professional them is best.
“Being very adversarial … it’s not going to end well,” she said. Enforcement actions could even be avoided with cooperation in some cases, panelists said.
The OCIE said in its recently-published priorities that it is also going to be focusing on examining the MSRB.
Michael Post, general counsel of the MSRB who was also a panelist, said that the board was recently examined with respect to its compliance with federal regulations aimed at safeguarding the technological infrastructure of the market. The MSRB has faced larger OCIE exams before and is apparently due for another, Post said.
“We produce thousands of documents to OCIE in those processes,” Post said, adding that he believes the MSRB’s experience is probably not unlike the experience of a registered entity like a dealer.
Panelists also discussed takeaways from recent SEC enforcement actions, noting that they have generally contained an element of public corruption such as when the commission in November charged Oyster Bay, N.Y. with hiding the existence and potential impact of side deals with a businessman who owned and operated restaurants and concession stands.
Evans said that the SEC is going to continue focusing on disclosure. “I don’t think that theme is going away anytime soon,” she said.
The NABL conference concludes Friday afternoon.
By Kyle Glazier
BY SOURCEMEDIA | MUNICIPAL | 02/22/18 07:01 PM EST
Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today requested input from municipal market participants and the public on a draft compliance resource about core requirements for municipal advisors related to providing advice on, and making recommendations of, municipal securities transactions or municipal financial products.
MSRB Rule G-42, on the duties of non-solicitor municipal advisors, forms the foundation of a comprehensive regulatory framework for municipal advisors developed as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The MSRB seeks to support compliance with various aspects of this key rule.
“Through our engagement with the municipal advisor industry, we have received many questions on the topic of advice versus recommendations,” said MSRB President and Executive Director Lynnette Kelly. “We are seeking further input from market participants to develop a useful compliance resource that addresses common questions and illustrates the application of the rule in scenarios that municipal advisors may encounter.”
The MSRB’s draft compliance resource is intended to enhance municipal advisors’ understanding and application of Rule G-42. The responses to frequently asked questions (FAQs) are not meant to be interpretive guidance and all proposed answers are derived directly from the rulemaking record. Though it is not routine for the MSRB formally to seek written comments on draft FAQs or similar compliance materials, the MSRB is seeking public input prior to the publication of a final document. Comments should be submitted no later than April 16, 2018.
“We have heard from stakeholders that they very much want the opportunity to further engage with the MSRB as we advance our long-term strategic goal to facilitate compliance,” Kelly said. “In this case, given that we are addressing a foundational rule for newly regulated entities, the MSRB believes market participation and public input will provide valuable insight that could improve the usefulness of the FAQs.”
Date: February 15, 2018
Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org
On November 7, the SEC’s National Examination Program issued a Risk Alert providing the SEC staff’s observations after conducting over 110 examinations of municipal advisors during the Municipal Advisor Examination Initiative. Some of the key observations highlighted by the Risk Alert include:
Rule Changes
MSRB Implements New CE Program for Municipal Advisors
January 1, 2018, The MSRB begins implementation of the continuing education program for municipal advisors, as required by amendments to MSRB Rule G-3.
Read the full information on the change.
Per the MSRB release, the adoption of continuing education (CE) requirements for municipal advisors represents an important milestone in developing professional standards and CE requirements as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The adoption of the amendments to establish CE requirements for municipal advisors furthers the MSRB’s mandate to protect investors, municipal entities, obligated persons and the public interest. The amendments to Rule G-3 help to ensure that those individuals engaging in municipal advisory activities on behalf of a municipal advisor, as well as those individuals that directly engage in the management, direction or supervision of the municipal advisory activities of the municipal advisor and its associated persons, remain current in their industry knowledge. The accompanying amendments to Rule G-8 promote compliance with a municipal advisor’s recordkeeping requirements related to the administration of its CE program. Municipal Advisors have until December 31, 2018 to complete a needs analysis, develop a written training plan and deliver training to comply with the annual CE requirements for 2018.
Rule Changes
Changes to MSRB Rule G-34
The Municipal Securities Rulemaking Board (MSRB) received approval from the Securities and Exchange Commission (SEC) on December 14, 2017, to amend MSRB Rule G-34, on CUSIP numbers, new issue, and market information requirements (the “amendments”).
Read the full notice and additional information.
The amendments will codify the MSRB’s longstanding interpretive view that brokers, dealers and municipal securities dealers (collectively, “dealers”) are “underwriters” when acting as placement agent in private placements of municipal securities, including direct purchases. In addition, the amendments will extend to non-dealer municipal advisors, the requirement that a municipal advisor obtain a CUSIP number when advising on a competitive transaction in municipal securities. Finally, the amendments will provide a principles-based exception for dealers (and municipal advisors in competitive sales) from the CUSIP number requirements when selling a new issue of municipal securities in certain circumstances where the dealer or municipal advisor reasonably believes (e.g., by obtaining a written representation) that the present intent of the purchasing entity is to hold the municipal securities to maturity or earlier redemption or mandatory tender. Dealers also will be able to rely on the principles-based exception with respect to the requirement to apply for depository eligibility for a new issue pursuant to Rule G-34.
The amendments will become effective on June 14, 2018.
Dinsmore & Shohl LLP – Kevin S. Woodard
USA February 8 2018
Summary
FINRA is requesting comment on the application of the following rules to government securities, including U.S. Treasury securities: FINRA Rules 2242 (Debt Research Analysts and Debt Research Reports); 5240 (Anti- Intimidation/Coordination); 5250 (Payments for Market Making); 5270 (Front Running of Block Transactions); 5280 (Trading Ahead of Research Reports); 5320 (Prohibition Against Trading Ahead of Customer Orders); and NASD Rules 1032(f) (Securities Trader), 1032(i) (Limited Representative – Investment Banking) and 1050 (Registration of Research Analysts). In addition, FINRA is requesting comment on the application of FINRA Rule 5320 as well as NASD Rules 1032(f) and 1050 to all debt securities, in addition to government securities.
Questions regarding this Notice should be directed to:
Afshin Atabaki, Associate General Counsel, Office of General Counsel (OGC), at (202) 728-8902; or
Meredith Cordisco, Associate General Counsel, OGC, at (202) 728-8018.
Comment Period Expires: April 9, 2018
The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) recently announced its 2018 national examination priorities, which are broken down into five categories: (1) compliance and risks in critical market infrastructure; (2) matters of importance to retail investors, including seniors and those saving for retirement; (3) Financial Industry Regulatory Authority and Municipal Securities Rulemaking Board matters; (4) cybersecurity; and (5) anti-money laundering programs.
The areas of greatest interest to funds and advisers are:
OCIE’s announced priorities should come as no surprise, as they reflect many of the concerns and risks the SEC and its staff have expressed in recent years. More importantly, these priorities should serve as a roadmap for firms to test for, enhance and remediate any suspected deficiencies in these areas as they assess their policies, procedures and compliance programs.
by Ryan F. Helmrich and John P. Falco
USA February 16 2018
Pepper Hamilton LLP
Annually, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (“OCIE”) publishes its examination priorities for the new year. Recently, OCIE announced five priorities that will inform its examinations moving in to 2018.
OCIE is committed to “promoting compliance, preventing fraud, identifying and monitoring risk, and informing policy.” In support of these “pillars,” OCIE intends to focus on:
Continue reading.
Squire Patton Boggs – Coates Lear, Tara M. Swaminatha and Elizabeth Weil Shaw
USA February 13 2018
Learn the fundamentals of upcoming mark-up disclosure requirements and determination of prevailing market price in a new MuniEdPro® course from the MSRB.
Click here to learn more.
Washington, DC –The Board of Directors of the Municipal Securities Rulemaking Board (MSRB) met January 24-25, 2018, where it discussed industry implementation of the mark-up disclosure rule, facilitating compliance with MSRB rules and other measures aimed at regulatory efficiency.
The Board discussed its mark-up disclosure rule scheduled to take effect May 14, 2018 under which municipal securities dealers will be required to disclose to retail investors their compensation on certain transactions, as part of a broader fixed-income market initiative that has been a coordinated effort with the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). The Board discussed the MSRB’s ongoing efforts to address challenges associated with industry implementation of the rule, including such topics as vendor readiness, systems development, systems integration and the role of testing and validation. The MSRB is preparing additional guidance following its prior publication of a set of FAQs, and the Board agreed to continue to coordinate with the SEC and FINRA to support compliance with the mark-up rule.
A strategic goal of the MSRB is to provide additional assistance to its regulated entities in complying with its rules. At its meeting, the Board discussed the work of its Compliance Advisory Group and the importance of ensuring that MSRB compliance resources are useful and reflect the needs of regulated entities. The MSRB established the advisory group in October 2017 to provide expertise and input to the Board to help inform the organization’s goal to facilitate industry understanding of and compliance with MSRB rules. In addition, the MSRB is currently seeking public and industry comment on how the MSRB can best support regulatory compliance. The comment period remains open until February 9, 2018.
“We are committed to listening and incorporating feedback from both our advisory group and market participants,” said MSRB Executive Director Lynnette Kelly. “We encourage general feedback in the current request for comment and recognize that in some cases, formal public comment on specific compliance materials may further benefit their usefulness.”
One way the MSRB supports compliance is by providing interpretive guidance on its rules, which is also used by entities that enforce MSRB rules. The Board agreed that it will consider changes to its policy on interpretive guidance that could better promote industry understanding of and compliance with MSRB rules while continuing to maintain an effective enforcement coordination program.
The Board also began to discuss comments received on its concept proposal regarding current practices in the primary offering of municipal securities that stems from its retrospective rule review. The MSRB will continue to consider ideas provided by commenters, but the Board agreed to prioritize an efficiency initiative discussed in the concept release related to data collected from underwriters by the MSRB on Form G-32. The Board directed staff to prepare a request for comment on a proposal to auto-populate Form G-32 with additional data that is currently submitted by underwriters into the Depository Trust & Clearing Corporation’s New Issue Information Dissemination Service (NIIDS) but that is not currently required on Form G-32. The request for comment will also seek input on including additional information on Form G-32 that is not currently submitted to NIIDS but that could support additional market transparency.
In another efficiency measure that developed out of the retrospective review of MSRB rules, the Board agreed to publish a request for comment on the proposed consolidation of MSRB requirements related to transactions in discretionary accounts into a single rule. The proposal also would establish limited, new requirements for other uses of discretion in customer accounts to provide clarity on dealer obligations and create greater consistency with similar rules of other financial regulators.
The Board also discussed MSRB professional qualification standards that it has determined to revise because of the October 2018 release of FINRA’s Securities Industry Essentials™ (SIE) examination. As previously announced, the MSRB will propose changes to the SEC to MSRB Rule G-3 to require the SIE as a prerequisite to qualification as one of four types of municipal securities representatives. The rule filing will also seek to update certain provisions of Rule G-3 to harmonize them with FINRA’s professional qualification standards.
The Board concluded its meeting acknowledging that both municipal securities dealers and municipal advisors are continuing to adapt to new market regulations and agreed that the timing of new requests for comment will be carefully calibrated to allow commenters to provide meaningful feedback as they accommodate new regulatory requirements.
Date: January 29, 2018
Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org
The MSRB is accepting applications for its Board of Directors from January 8, 2018 through February 16, 2018. The MSRB Board of Directors includes 11 members who are public and 10 members who are representatives of MSRB-regulated broker-dealers, banks and municipal advisors. All individuals must be knowledgeable about the municipal market. MSRB Rule A-3, “Membership on the Board,” discusses the nomination and election process, including provisions about eligibility and membership requirements.
The Board of Directors’ Nominating and Governance Committee publicly announces the solicitation of applicants for vacant positions on the Board that begin in October, which is the start of the MSRB’s fiscal year. The committee accepts applications for at least 30 days through the online Board of Directors Application Portal; the beginning and end dates are specified in the announcement(s). Any interested individual with knowledge of the municipal securities market may apply or submit recommendations to the Nominating and Governance Committee.
MSRB staff conducts an initial review of applicants’ materials to confirm their status as a public or regulated representative and ensure that all necessary information and documentation is provided.
At the end of the application submission period, the Nominating and Governance Committee reviews all applications and selects candidates for interviews during the third and fourth quarter of the fiscal year. Additional documentation, including the Board Member Candidate Questionnaire and consent to a background check are required for applicants who are interviewed. After completion of the interview process, the Nominating and Governance Committee nominates selected candidates to the full Board of Directors for election. This occurs during the fourth quarter of the fiscal year and is concluded by September 30. Upon election, the new Board members are publicly announced and the complete list of applicants is published on the MSRB’s website.
Questions about the application process should be directed to MSRB staff at 202-838-1349.
To eliminate duplicative testing of general securities knowledge on the current representative-level qualification examination, FINRA has recently filed with the Securities and Exchange Commission a proposed rule change to restructure its representative-level qualification examination program. View the notice here.
When the rule proposal is officially filed with the SEC and published in the Federal Register a 21-day comment period will begin. The BDA will submit a comment letter and will reach out to membership about a comment letter draft.
The proposed rule change, which is set to become effective on October 1, 2018, will restructure the examination program so that all new representative-level applicants must pass both the Securities Industry Essentials (SIE) examination and a revised representative-level qualification examination, such as the revised General Securities Representative (Series 7) examination, appropriate to their job functions at the firm with which they are associating before their registrations can become effective.
The implementation date of October 1, 2018, is set to coincide with the implementation of the restructured representative-level examination program.
The rule change also proposes that the SIE be divided into the following four sections:
The number of questions on the SIE examination will be 75 scored multiple-choice questions and candidates will have one hour and 45 minutes to complete the examination.
The SIE content outline will be made available on FINRA’s website no later than April 1, 2018.
February 1, 2018
WASHINGTON, Jan 25 (Reuters) – The U.S. securities regulator is investigating practices by some participants in the $3.8 trillion municipal securities market, the California treasurer’s office said on Thursday.
The California State Treasurer’s Office received an inquiry from the Securities and Exchange Commission, which is conducting an investigation into transactions in the municipal securities market, a spokesman for the office said.
The inquiry was not directed at any conduct of the treasurer’s office, he confirmed.
The SEC declined to comment.
The investigation of the market, where states, cities, schools and others issue bonds, was first reported by Bloomberg.
It was not clear if the probe was nationwide.
The SEC began ramping up its oversight of the muni bond market in 2014, when it launched the Municipalities Continuing Disclosure Cooperation initiative.
The program offers favorable settlement terms to municipal bond underwriters and issuers that self-report material misstatements and omissions in offering documents.
The program has led to a slew of enforcement actions, with the SEC charging 71 municipal issuers for violations in municipal bond offerings in August 2016.
(Reporting by Michelle Price; Editing by Lisa Von Ahn)
Oversight of the $3.8 trillion municipal securities market is grounded in the concept of “self-regulation.” Under this long-standing model, the public and private sectors work together to protect investors’ ability to participate in a critical capital market that supports infrastructure financing, economic development and job creation in communities around the country.
The self-regulatory organization (SRO) model capitalizes on the collective and specialized knowledge of market practitioners to develop rules of conduct that are subject to strong government oversight, and, importantly, provides the financial resources to maintain a robust regulatory regime. While the SRO model has been periodically reexamined, federal lawmakers have largely reaffirmed the benefits of self-regulatory oversight of the capital markets. The Municipal Securities Rulemaking Board, which was created by Congress in 1975 to regulate the municipal securities market, has distinctive characteristics that can provide an important perspective in the ongoing dialogue about self-regulation.
There are four key advantages of the MSRB’s SRO model, outlined in a new report from the MSRB. First, Congress has given us clear marching orders, with our jurisdiction and mission well-defined in federal law. The MSRB is the only SRO specifically established by Congress, which authorized the MSRB to write rules of fair play for municipal securities dealers and municipal advisors, subject to oversight by the U.S. Securities and Exchange Commission. Congress enshrined in the federal securities laws the mission of the MSRB: “to protect investors, municipal entities, obligated persons, and the public interest, and to promote a fair and efficient market.” This statutory mandate gives the MSRB clear direction about its purpose, authority and jurisdiction. We adhere to our mission with the greatest sense of responsibility to those we are charged to protect and to the integrity of the market.
Second, our governance structure and regular engagement with stakeholders allow us to leverage the diverse and specialized expertise our market requires. The 21 members of our Board of Directors have the knowledge and experience to address the complexities and needs of the municipal securities market. Board members lend insights from their time managing investment portfolios, overseeing and advising on bond issuance in city budget offices, structuring transactions at underwriting desks and everywhere important decisions are being made about municipal securities. While the Board has strong and diverse representation of the dealers and municipal advisors who must follow our rules, the majority of the Board represent the interests of those our rules are designed to protect—bond investors, issuers and the public. A majority-public Board minimizes the risk that regulated entities, particularly large firms, could dominate the Board and perhaps improperly influence rulemaking.
The Board’s considerable experience and expertise allow the organization to design and develop practical rules that are specifically tailored to the municipal securities market. Further, the MSRB’s commitment to economic analysis and a participatory rulemaking process ensures market participants and the public can provide input and data on the potential effects of MSRB rules as they are developed.
Third—and something that distinguishes us from many other financial market SROs—we don’t run a securities exchange or answer to shareholders, and therefore have no profit motive. There is no centralized exchange marketplace for municipal securities because of the size and diversity of the market. Rather, the MSRB operates a free public platform—the Electronic Municipal Market Access (EMMA®) website—that centralizes previously diffuse municipal securities information and brings an entirely new level of transparency to the market.
The MSRB is completely self-funded and receives no taxpayer dollars. Our operations are funded primarily through fees on the entities we regulate. This reliance on industry for our revenues makes it even more important to hold ourselves to the highest standards of financial sustainability, corporate transparency and public accountability. In addition to publishing annual audited financial statements, we also now publish an annual budget summary, which demonstrates our strict financial management and illustrates how our resource allocation supports our mission-driven activities.
Fourth—and this is another distinction from our fellow SROs—we have no enforcement authority. Many SROs have the ability not only to write rules governing their members, but also to enforce those same rules. The MSRB has exclusive jurisdiction to write the rules for municipal market professionals, but we play a supporting role to other agencies when it comes to enforcement. This separation of rule-writing and rule-enforcement prevents dealers and municipal advisors, including MSRB Board members, from exerting any influence on the zealousness of enforcement of MSRB rules.
The SRO model leverages the benefits of the public and private sectors, with government providing oversight, and representatives of industry contributing insight into the practical realities of implementing regulatory objectives. The MSRB’s distinctive SRO structure—defined in federal law, highly specialized, free of profit motive and without enforcement authority—effectively and efficiently achieves the benefits of self-regulation while mitigating the potential for conflicts of interest.
Our promise to the industry we regulate is to always remain open to dialogue about how we can do better. We are public and transparent about our regulatory agenda, releasing a list of regulatory discussion topics in advance of each quarterly Board meeting and publishing a summary of the Board’s decisions immediately following each meeting. We participate in scores of market events each year, host dozens of educational webinars and regularly meet with trade groups to share information and respond to questions. We welcome the chance to contribute to an ongoing conversation about how to improve the execution of the MSRB’s unique SRO model.
The Bond Buyer
By Lucy Hooper
January 22 2018
Lucy Hooper is Chair of the Municipal Securities Rulemaking Board’s Board of Directors.
SUMMARY
SIFMA provides comments to the Municipal Securities Rulemaking Board (MSRB) in response to request for public comment on its approach to enhancing compliance support, a long-term strategic priority for the organization. SIFMA appreciates the opportunity to address certain concerns and present our views on how the MSRB can contribute to resolving them: (1) the need for more published MSRB interpretive guidance, (2) the need for the MSRB and examiners to work together to articulate guidance on the recordkeeping that will be required to demonstrate compliance with MSRB rules, (3) the need to increase the usefulness of MSRB compliance resources, including enhancing the MSRB website, simplifying email subscriptions, and improving the accessibility and content of educational materials and events, and (4) the need for MSRB participation at relevant industry conferences.
See: MSRB Notice 2017-22: Request for Comment on Compliance Support
January 23, 2018
The U.S. Securities and Exchange Commission is investigating “certain market practices” by participants in municipal securities transactions, according to the California treasurer’s office, which received a request for information from the federal agency.
“The inquiry relates to a confidential investigation the SEC is conducting into certain market practices engaged in by participants in municipal securities transactions, and was not directed at any conduct of the treasurer’s office,” the treasurer’s office said in a statement.
The disclosure was made in response to a public-records request. The treasurer’s office declined to give further detail, saying that it didn’t want to interfere with SEC enforcement proceedings. It is unclear if the inquiry is an industrywide probe or an investigation of just certain participants.
Bill Lockyer, who was California treasurer from 2007 until 2015 and attorney general before that, said his office didn’t receive such an inquiry during his tenure. The SEC request could mean “they were asking to understand how some of the bond issuances were done and the role of the different participants” such as bond lawyers and financial advisers, Lockyer said in a telephone call Thursday.
Current Treasurer John Chiang’s office received the first inquiry last April, said general counsel Mark Paxson.
Increased Scrutiny
Government officials from New York, Florida, Illinois, Arizona and Texas all said their states had not received any similar requests for information. Officials from New Jersey, Wisconsin, Oregon and Washington did not immediately respond to calls asking if they had received such requests from the SEC.
John Nester, a spokesman for the SEC, declined to comment.
The SEC, whose mission is to protect investors, over the past several years has stepped up scrutiny of the $3.8 trillion municipal bond market, a haven of buy-and-hold investors. Its Municipalities Continuing Disclosure Cooperation Initiative, which sought to prod governments into honoring their legal obligations to provide timely financial updates to investors, led to a wave of settlements since it started in 2014. The agency has also settled with governments such as New Jersey and Illinois for misleading statements in bond-offering documents.
The municipal bond market’s regulator — the Municipal Securities Rulemaking Board — last year warned state and local government officials against disclosing material financial information to only a limited audience, such as bondholders or analysts.
While state and local government issuers are exempt from U.S. Securities and Exchange Commission rules prohibiting selective disclosure, they are subject to anti-fraud laws. Municipalities could face federal fraud liability if known material information is omitted from public disclosures, the MSRB said, and if an investor acts on improperly disclosed information it could amount to insider trading.
Last year, the Port Authority of New York and New Jersey agreed to pay U.S. regulators $400,000 for failing to disclose risks to investors in $2.3 billion of bonds that helped finance New Jersey roadway projects. In 2016, the SEC reached settlements with 71 state and local borrowers for lying to investors about their compliance with disclosure requirements when they sold bonds, as part of an SEC initiative to crack down on disclosure failures.
Enforcement actions often are targeted at individual market participants, such as a town on Long Island last year that was sued for failing to disclose that the municipality guaranteed loans for a local restaurant owner who allegedly lavished officials with cash, trips and other bribes.
The actions also can broad, such as the settlement by 14 underwriting firms in 2016 over disclosure practices. And in June 2015, the SEC alleged that 36 underwriters, including Wall Street’s biggest banks such as Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., sold bonds for municipalities that failed to make adequate financial disclosures to investors.
Bloomberg
By Romy Varghese
January 25, 2018, 9:35 AM PST Updated on January 25, 2018, 2:36 PM PST
— With assistance by Martin Z Braun, Zachary Hansen, and Joe Mysak
PHOENIX – The Municipal Securities Rulemaking Board is seeking approval for both a new rule restricting the advertising practices of municipal advisors and modifications to its existing rule governing broker-dealer advertising to bring it more in line with other regulators’ rules.
The MSRB filed the proposals for the new Rule G-40 on advertising by municipal advisors and the amendments to Rule G-21 on advertising by municipal securities dealers with the Securities and Exchange Commission Thursday evening.
If the filing is approved by the SEC, it would establish a set of rules for muni advisor advertising that the National Association of Municipal Advisors said last year was not necessary because MSRB’s Rule G-17 on fair dealing already covers these issues.
The MSRB first proposed the new rule and the G-21 amendments in February 2017 but has now asked the SEC to approve them nine months before they become effective.
G-40 would define an “advertisement” as “any material (other than listings of offerings) published or used in any electronic or other public media, or any written or electronic promotional literature distributed or made generally available to municipal entities, obligated persons, municipal advisory clients or the public,” including such things as telemarketing scripts or press releases.
The rule prohibits advertising that is misleading, disallows projections of performance, and “must consider the nature of the audience to which the advertisement will be directed as well as provide details and explanations appropriate to the audience.”
Under the proposed rule, every advertisement must be approved in writing by a municipal advisor principal, and the advisor must keep updated records of all such advertisements.
“The proposed new standards for fairness and accuracy in municipal advisor advertising will augment the MSRB’s core regulatory framework intended to protect municipal entities and obligated persons,” said MSRB Executive Director Lynnette Kelly. “Under MSRB rules created to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act, municipal advisors are subject to core standards of conduct, supervision obligations, regulations to address pay-to-play activities and professional qualification requirements.”
“Proposed Rule G-40 is well-tailored for municipal advisors and municipal advisor solicitors but is similar to advertising standards for dealers, which have been in place for nearly 40 years,” Kelly added.
Municipal advisors also are not permitted to use testimonials in their advertisements. The MSRB made some changes from its original request for comment, and now proposes to allow dealers to use testimonials under some circumstances.
The MSRB added clarifications to the proposals for both G-40 and G-21 that make clear that firms can’t omit material information from advertisements if omitting those facts or information would make the ad misleading.
The Securities Industry and Financial Markets Association said in a statement that while it appreciates the MSRB’s efforts to harmonize rules and level the playing field between broker-dealer firms and muni advisor firms, it is disappointed that some of its suggestions were not adopted in the MSRB’s final proposal.
“With respect to testimonials, although we appreciate the revisions to harmonize MSRB Rule G-21 with FINRA 2210(d)(6), we do not agree that such testimonials should be prohibited by municipal advisors,” said SIFMA managing director, associate general counsel, and co-head of munis Leslie Norwood. “SIFMA supports the principles in the rules that communication to the public must be fair and balanced, but those principles also should apply to the related regulatory burdens.”
The proposals are subject to SEC approval, including the SEC’s own public comment process. The SEC could choose to approve the proposals as submitted, or could decide they need some tweaking.
By Kyle Glazier
BY SOURCEMEDIA | MUNICIPAL | 01/19/18 07:06 PM EST
Washington, DC – Following a 2017 request for comment and further careful consideration of its advertising rule proposals, the Municipal Securities Rulemaking Board (MSRB) today filed with the Securities and Exchange Commission (SEC) a proposed new rule, MSRB Rule G-40, on advertising by municipal advisors, and amendments to MSRB Rule G-21, on advertising by municipal securities dealers.
“The proposed new standards for fairness and accuracy in municipal advisor advertising will augment the MSRB’s core regulatory framework intended to protect municipal entities and obligated persons,” said MSRB Executive Director Lynnette Kelly. Under MSRB rules created to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act, municipal advisors are subject to core standards of conduct, supervision obligations, regulations to address pay-to-play activities and professional qualification requirements.
“Proposed Rule G-40 is well-tailored for municipal advisors and municipal advisor solicitors but is similar to advertising standards for dealers, which have been in place for nearly 40 years,” Kelly said. Today’s rule filing includes proposed updates to the MSRB’s dealer advertising rule to promote regulatory consistency with certain advertising rules of other financial regulators.
To inform its approach to the development of proposed Rule G-40 and amended Rule G-21, the MSRB in February 2017 requested industry and public comment on topics including how municipal advisors use advertising and considerations for streamlining and modernizing dealer advertising regulations. Based on commenter feedback, the MSRB revised its draft amendments to Rule G-21 to permit testimonials in dealer advertisements under certain circumstances. Further, the MSRB clarified the definition of advertisement under proposed Rule G-40 for advertising by solicitor municipal advisors.
Both rules include language clarifying that dealers and municipal advisors cannot omit any material fact or qualification from an advertisement if the omission would cause the advertisement to be misleading. Both rules also include guidance that the determination of the number of persons receiving a response to a request for proposal or similar request is determined at the entity level, another change suggested by commenters.
The MSRB has requested an effective date of nine months for the proposed changes, if approved by the SEC following its public notice and comment process. View the filing.
Date: January 18, 2018
Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org
The Securities and Exchange Commission is accelerating work on its own version of the “fiduciary rule,” a regulation issued by the Labor Department that put restraints on brokers handling retirement accounts.
The SEC hopes to vote to propose its own rule by the second quarter of 2018. That would be a first step toward creating consistent standards across brokerage accounts since the Labor Department’s rules only covered 401(k)s and individual retirement accounts.
The SEC has struggled for years to harmonize the rules brokers and investment advisers face when they serve retail clients. Consumer groups that backed the fiduciary rule are likely to oppose the SEC proposal if they believe it would give Wall Street an end-run around Labor’s stricter approach.
SEC staff has held meetings in recent weeks with brokerage firms and trade groups regarding work on a ‘”fiduciary” standard. BDA members will meet next week with SEC Chairman Jay Clayton and Commissioners Piwowar and Stein.
The SEC proposal could emerge later than the spring of 2018 because the agency will add two new commissioners in the coming weeks. Both new commissioners, Robert Jackson and Hester Peirce, could want time to study the proposal.
Any SEC measure could affect future revisions to the Labor Department’s rule affecting retirement accounts. Some want the Labor Department to exempt firms that comply with a new SEC standard from Labor’s fiduciary rule. That would allow the SEC to again regulate all brokerage activity and wouldn’t require the Labor Department to go through the cumbersome process of revising its regulation.
Already, under President Trump, the Labor Department has delayed parts of its fiduciary rule until July 2019, saying the rule has reduced choices for investors and imposed huge compliance problems for firms.
Bond Dealers of America
January 10, 2018
The Securities and Exchange Commission held its first Fixed Income Market Structure Advisory Committee (FIMSAC) meeting on Thursday, January 11. The meeting was the first official activity for new SEC commissioners Hester Peirce and Robert Jackson, who were sworn in that morning.
The 23-member FIMSAC group, which was announced in November, includes several significant players, including three BDA members. Among the panelists was Kevin McPartland, head of market structure and technology research at Greenwich Associates, a key BDA partner.
The commissioners and panel members touched on concerns about the bond markets generally but focused this first discussion primarily on liquidity in the corporate bond market. SEC Chairman Jay Clayton did note that the municipal market is “large and vital” and has experienced significant growth in recent years. He called munis critical for U.S. infrastructure.
Bond dealers have expressed worry that regulations designed to keep banks solvent in the wake of the 2007-2008 financial crisis have de-incentivized banks to be buyers of bonds. On the municipal side, this has been a key factor in the industry’s push to classify munis as high-quality liquid assets for purposes of federal banking rules.
FIMSAC is chaired by Michael Heaney, non-executive director at Legal & General Investment Management America, and includes many corporate bond and muni experts. Some market participants have speculated that the committee could eventually lead to more efforts to harmonize muni and corporate bond rule.
Bond Dealers of America
January 16, 2018
WASHINGTON — The Municipal Securities Rulemaking Board will consider various topics at its meeting next week, including the market comments it received on whether new rules or guidance are needed on primary offering practices.
The board, which will meet Jan. 24 and 25, also said it will discuss the use of discretion in customer accounts and the potential of consolidating requirements in existing MSRB rules, as well as establishing limited, new requirements for greater consistency with similar rules of other regulators.
Another topic to be considered, according to an MSRB notice, is a proposed rule filing to update certain provisions of its professional qualification standards in its Rule G-3 so that they are in line with similar standards of other regulators.
The board will also review its multi-year strategy, its progress on efforts to facilitate understanding of and compliance with regulatory obligations, and its policy on interpretive guidance.
The MSRB published a concept proposal in September asking for input on numerous aspects of primary offering practices, which are covered by its Rule G-11. Also, the board’s Rule G-32 covers the disclosure that must be made in connection with primary offerings.
But dealer and municipal advisor groups responded that they didn’t think the board needed wholesale changes in its rules on primary offering practices and even questioned the MSRB’s authority for certain suggested changes.
The board asked, for example, whether it should amend its Rule G-11 to require members of syndicates to make a bona fide public offering of the bonds allocated to them at the public offering price.
Syndicate members sometimes agree to this in documents signed before the sale, but do not always follow through on it.
The Securities Industry and Financial Markets Association told the MSRB that underwriters must abide by their agreements and said no new requirement should be created.
“SIFMA strongly believes that the issuer has the right to determine whether it wants its new issue to be sold in a bona fide public offering or by some other means,” SIFMA said in its comments.
The dealer group said it was concerned that such a rule would require “line drawing” to account for instances where a bona fide public offering would be inappropriate, such as in a private placement or limited offering.
“Any such line-drawing raises the considerable risk of regulations driving market decisions rather than the intentions of the party or free market forces,” SIFMA wrote in its comments to the board.
SIFMA also said that it doesn’t see a need for a new MSRB requirement for the senior syndicate manager to inform all other syndicate members simultaneously when a bond purchase agreement is executed, and explicitly state that, in negotiated sales, retail or institutional priority orders must be allocated up to the amount of priority set by the issuer before being allocated to lower priority orders.
The National Association of Municipal Advisors took issue with the MSRB’s question of whether it should require the submission of preliminary official statements to EMMA. Some issuers already submit POS’ to EMMA voluntarily.
“We believe that the MSRB lacks the statutory authority to create such a rule for either municipal advisors or broker/dealers and that such a requirement would violate the Securities Exchange Act” of 1934,” NAMA said in comments.
Not all of the comments were negative.
Robert Doty, the president and proprietor of muni bond consulting company AGFS told the board that it should amend G-32 to require a dealer that sells any offered municipal securities to a customer to disclose all of its compensation in a negotiated offering that is dependent upon the completion of either specific stages in an offering or the entire offering.
Doty noted that undisclosed compensation based on specific stages of the transaction were key pieces of a 2016 Securities and Exchange Commission enforcement action against the Rhode Island Economic Development Corporation and Wells Fargo (WFC), in which the commission alleged a conflict of interest that should have been disclosed to bond investors.
The MSRB can choose to ask for additional market comments, propose rules or rule changes for further comment, file proposals with the SEC, or take no further action.
By Lynn Hume
BY SOURCEMEDIA | MUNICIPAL | 01/17/18 07:13 PM EST
Washington, DC – As the municipal securities market’s self-regulatory organization (SRO), the Municipal Securities Rulemaking Board (MSRB) publishes an annual report highlighting the previous year’s initiatives in support of a fair and efficient market, as well as information about the organization’s financial position. The MSRB’s 2017 Annual Report emphasizes the organization’s commitment to an inclusive, transparent approach to safeguarding market integrity.
“The success of the MSRB – and the integrity of our market – depends on the expertise and insight of market participants who represent investors, communities that issue bonds and the financial professionals who serve them,” said Board Chair Lucy Hooper. “The MSRB’s SRO model leverages the benefits of the public and private sectors, with government providing a clear statutory mandate and strong oversight, and industry practitioners contributing insight into the practical realities of developing and implementing regulatory objectives.”
The annual report describes the MSRB’s regulatory initiatives throughout 2017, which include the development of extensive written guidance to assist municipal securities dealers in preparing to comply with mark-up disclosure regulations, and the implementation of the Municipal Advisor Representative Qualification Examination (Series 50 exam).
The annual report also details the continuing evolution of the MSRB’s Electronic Municipal Market Access (EMMA®) website, which was enhanced with new tools and resources, including municipal market yield curves and indices, a new issue calendar and enhanced trade statistics in 2017. Additionally, the annual report reviews the MSRB’s efforts to support understanding of the municipal securities market through objective, authoritative education, such as the growing catalog of interactive, online MuniEdPro® courses geared toward municipal market professionals seeking continuing education.
The MSRB annual report presents financial highlights for the fiscal year, as well as full audited financial statements. “The MSRB is dedicated to managing resources responsibly and maintaining sufficient reserves to operate without interruption, regardless of market conditions,” said MSRB Executive Director Lynnette Kelly. “The MSRB intends to continue its diligent financial stewardship while evaluating ways to diversify its funding sources in the year ahead.”
Date: January 11, 2018
Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org
Exxon Mobil cites investor documents in legal battle over risks
California communities demanding oil companies protect them from rising sea levels weren’t as sure about their vulnerability to climate change when they sold debt to investors, according to court filings and bond documents.
Seven local governments in California are suing Exxon Mobil Corp. and other major oil producers for court orders forcing those companies to cover the costs of sea walls and other infrastructure projects meant to fortify low-lying areas.
Now Exxon, one of the defendants, is launching a new counterattack by highlighting past bond disclosures in which its government critics suggested they couldn’t predict whether and when sea levels would rise. The company filed court papers in Texas on Monday seeking to force government officials to answer questions under oath about those statements.
The underlying lawsuits are part of an aggressive strategy to hold fossil-fuel companies responsible for climate-change costs that the plaintiffs estimate could run to billions of dollars. Local officials are arguing that Exxon, BP PLC and other companies knew or should have known about the potential impacts of burning oil and gas but instead tried to sow public doubt about the science behind global warming.
The companies dispute those allegations, casting the lawsuits as an abusive campaign by California law-enforcement officials to target political opponents through the legal system and stifle debate on climate change. Scientists have linked rising sea levels to fossil-fuel emissions and warming global temperatures.
“The idea that oil companies might sue public servants personally in an attempt to intimidate them from protecting their communities and environment is abhorrent but consistent with their prior behavior,” San Mateo County counsel John Beiers said. “We will not be intimidated.”
The cities of Oakland, San Francisco, Santa Cruz and Imperial Beach are also plaintiffs as are Santa Cruz County and Marin County.
The legal battle is intensifying while awareness grows among investors about the potential credit risk to U.S. municipalities from future changes in world-wide temperatures. In November, Moody’s Investors Service flagged environmental disruptions as a “growing negative credit factor” for coastal municipalities and said it would adjust its ratings methodology to take climate change into account.
Moody’s didn’t issue any credit downgrades but warned local governments to start dealing with climate risks or else possibly lose their access to low-cost financing.
Exxon’s Monday filing in Tarrant County, Texas, laid out what it said was a disconnect between the claims in those lawsuits and what the municipalities told their bond investors about their exposure to climate risks.
San Francisco’s lawsuit said it faced “imminent risk of catastrophic storm surge flooding,” while a general obligation bond offering last year said the city “is unable to predict whether sea-level or rise or other impacts of climate change…will occur.”
Santa Cruz County said in its complaint it was experiencing more frequent and extreme droughts, precipitation events, heat waves and wildfires, and faced a 98% chance of a “devastating” three-foot flood by 2050. Yet a bond offering last year mentioned only “unpredictable climatic conditions, such as flood, droughts and destructive storms” as a risk factor.
“Each of the municipalities warned that imminent sea level rise presented a substantial threat to its jurisdiction and laid blame for this purported injury at the feet of energy companies,” Exxon said. “Notwithstanding their claims of imminent, allegedly near-certain harm, none of the municipalities disclosed to investors such risks in their respective bond offerings.”
Santa Cruz city attorney Anthony P. Condotti said the evidence linking climate risks to fossil-fuel industry practices “has no bearing on any bond offering documents issued previously.”
The lawsuits against Exxon, BP, Chevron Corp. , ConocoPhillips and Royal Dutch Shell PLC allege the companies are a “public nuisance” and ask courts to force them to create a fund for local governments to pay for climate change-related infrastructure.
The lawsuits have drawn comparisons to U.S. states’ legal campaign against tobacco manufacturers in the 1990s, which netted multibillion-dollar settlements to offset the public costs of smoking-related disease.
In 2015, New York Attorney General Eric Schneiderman began an investigation into Exxon Mobil that was joined by Massachusetts Attorney General Maura Healey. Mr. Schneiderman, a Democrat, has alleged that Exxon misled investors about how it accounts for the impact of climate change on its business.
Exxon has alleged the investigation is part of a conspiracy by activists and oil antagonists to smear the company. A number of Republican lawmakers and attorneys general have sought to join Exxon’s effort to fight the probe and have also sought to investigate Mr. Schneiderman.
The Wall Street Journal
By Andrew Scurria
Updated Jan. 8, 2018 10:32 p.m. ET
—Alejandro Lazo and Bradley Olson contributed to this article.
Summary
Last summer, seven California cities and counties sued 17 oil and gas energy producers claiming that they have created a public nuisance and have caused climate change related damage that has increased sea levels in California and exposed the plaintiff governments to massive damages from natural disasters. Exxon Mobil (XOM) has now filed a petition, in District Court, to depose a number of people in the matter.
This is the latest in a series of lawsuits brought by California, Massachusetts, Vermont, and New York and a small number of other cooperating state and local governments against auto, utility, and energy-producing businesses.
Given the severity and specificity of the claimed harm and damages sought, it is peculiar that the disclosures in the plaintiff’s municipal and city bond issuance documents make very limited disclosures of any climate change risks. As a result, it appears these suits will either (A) create new economic risks and hazards for bond investors and, in the case of ‘wrapped’ deals, the bond insurers that wrap those California municipal debts or (B) provide the investors and bond insurers with the information with which to claim they have been defrauded by those municipalities.
Ironically, as a result of the subprime mortgage crisis, many of the same California counties that brought these latest environmental lawsuits filed suits against the five largest municipal bond insurers for “forcing” local governments to needlessly buy bond insurance in order to get higher credit ratings and issue debt with lower interest rates.
Analysis
We have compiled a full analysis of each municipal bond issued within each plaintiff geography and all relevant details. In the coming days, we will quantify the wrapped versus unwrapped exposures and, in the case of an insured transaction, the bond guarantor. In 2016 and 2017 alone, these issuers sold bonds with over $25.36 billion of principal amount.
Have the tables turned?
The lawsuits against Chevron (CVX), Exxon Mobil, BP (BP), Shell Oil (RDS.A) (RDS.B) and over a dozen other firms now may provide the bond insurers and investors with a cause of action against the California plaintiffs in this case for failure to disclose, in bond deals, what it claims are massive environmental risks and damages to those counties and cities.
While the lawsuits claim significant harms to those cities and counties, those harms were not disclosed in the hundreds of bond issuances by those governments. In fact, while the plaintiffs in the suits claim grave and specific harms, their bond filings were largely silent on those risks and harms. As The Wall Street Journal highlighted in a headline today: “California Municipalities’ Debt Disclosures Contrast With Climate Warnings.” As a result, the issuers were almost certainly able to benefit from lower issuance costs that they would have been had they disclosed the risk to investors and, in the case of bonds that were wrapped by bond insurers, they likely paid lower insurance premiums than they would have had they fully disclosed the risks to the insurers.
As example, the City of Oakland claimed, in the lawsuits massive fossil-fuel production causes a gravely dangerous rate of global warming and ongoing and increasingly severe sea level rise harms to Oakland and that by 2050, a hundred year flood will occur every 2.3 years. These claims are in stark contrast to Oakland’s disclosures in its bond disclosures in this they state:
“The City is unable to predict when seismic events, fires or other natural events, such as sea rise or other impacts of climate change or flooding from a major storm, could occur, when they may occur, and, if any such events occur, whether they will have a material adverse effect on the business operations or financial condition of the City or the local economy.”
Similarly, San Francisco, another plaintiff, claims it is planning to fortify its Seawall in an effort to protect itself from rising sea levels and that the short-term costs of doing so will be more than $500 million with long-term upgrade costs of $5 billion. In San Francisco’s bond disclosures, it has stated:
“The City is unable to predict whether sea-level rise or other impacts of climate change or flooding from a major storm will occur, when they may occur, and if any such events occur, whether they will have a material adverse effect on the business operations or financial condition of the City and the local economy.”
Similar inconsistencies exist between the claimed harms and bond disclosures of Marin County, San Mateo County, the City of Imperial Beach, the County and City of Santa Cruz (the other plaintiffs in the lawsuits).
If one looks at the history of state, municipal and local lawsuits against various parties for damages related to their contribution to climate change, it becomes clear that these suits are actually targeting environmental federal policies through legal actions against federally regulated entities.
Background
In 2004, eight states, three land trusts, and the City of New York filed two coordinated lawsuits against five power generation companies, including American Electric Power (NYSE:AEP). The cases were consolidated as Connecticut v. Am. Elec. Power Co., 406 F. Supp. 2d 265 (S.D.N.Y. 2005). The plaintiffs alleged the pollution created by the defendants generation of power led to global warming and constituted a public nuisance under federal common law.
In 2006, California Attorney General filed another related lawsuit, this time against the six-largest U.S. automakers. The suit alleged the automakers’ emissions contributed to global warming and that the State had suffered property and other damage as a result.
In 2011, the Supreme Court ruled against the plaintiffs, and for the industry, in the AEP suit. In the Opinion of the Court, Justice Ginsberg stated: “[W]hen Congress addresses a question previously governed by a decision rested on federal common law,” the Court has explained,
“the need for such an unusual exercise of law-making by federal courts disappears… We hold that the Clean Air Act and the EPA actions it authorizes displace any federal common law right to seek abatement of carbon-dioxide emissions from fossil-fuel fired power plants. Massachusetts made plain that emissions of carbon dioxide qualify as air pollution subject to regulation under the Act. 549 U. S., at 528-529. And we think it equally plain that the Act “speaks directly” to emissions of carbon dioxide from the defendants’ plants.”
The current suit by five California municipal governments is filed as tort complaints against Exxon Mobil and 17 other energy companies accusing them of harms associated with rising sea levels. While we believe the chances of success by the plaintiffs are remote, the risks they create for all parties are meaningful and worth watching.
Politics
While each of these suits targets different business interests commonly associated with climate change and global warming risks there is little doubt that these suits have been the result of the dissatisfaction some states feel towards federal environmental and energy policies. As example, in explaining the basis for the AEP lawsuit, one of the strategists behind it stated,
“the cases were brought in response to the lack of response from the George W. Bush Administration to the climate change crisis. Specifically, the public nuisance lawsuit, seeking only injunctive relief, was filed after the Administration announced it would not support amendment of the Clean Air Act to impose new emissions limits on C02, and after the White House disavowed the Kyoto Protocol”.
Seeking Alpha
Josh Rosner
Jan. 9, 2018
NEW YORK (Reuters) – The post-trade processor for U.S. stocks, as well as corporate and municipal bonds, said it is taking steps to further cut the time it takes to settle trades in a bid to reduce risk in the financial system and free up more capital.
The U.S. financial services industry moved to a two-day settlement cycle, which refers to the time an investor’s order is executed to when cash and ownership of the security must be exchanged, from three days in September. Three-day settlement had been in place since 1995.
The move reduced capital requirements for financial firms by 25 percent, or $1.36 billion, in part because it meant trading margins did not need to be held as long, according to the Depository Trust and Clearing Corporation.
Now the DTCC, an industry-owned organization that processes nearly all U.S. securities transactions, plans to cut another full market day of risk from the settlement cycle by settling trades in the morning, pre-market open, instead of later in the afternoon, said Mike McClain, head of equity clearing at the DTCC.
The move, planned for early next year, will not require any changes by industry participants and will again reduce capital requirements for trading firms, McClain said in an interview. He said the DTCC is working on a study to determine the exact amount of savings to the industry.
The idea of shortening the settlement cycle gained steam during the 2007-09 global financial crisis as a way for firms to limit the risk associated with the person or firm on the other side of a trade defaulting.
Currently, traders can choose to have their orders settled in a single day, but it can be difficult to find the other side of a trade that is also seeking faster settlement. Such trades make up less than one percent of the 56 million trades the DTCC processes on an average day.
In an effort to make it easier to match buyers and sellers who want expedited settlement, the DTCC is also in talks with two alternative trading system (ATS) operators about helping to create exchange-like trading venues that would only accept orders for single day settlement, McClain said.
He declined to name the ATS operators because the talks are ongoing, but said at least one of the trading venues could have the changes in place this year.
Reporting by John McCrank; Editing by Susan Thomas
JANUARY 12, 2018
Washington, DC – In light of developments in the use of alternative trading systems (ATSs) and the role of broker’s brokers in the municipal securities market, the Municipal Securities Rulemaking Board (MSRB) today reminded municipal securities dealers about their regulatory responsibilities related to filtering out bids on an ATS and offers from certain dealers when they transact municipal securities. The MSRB recognizes that the practice of filtering, which may also occur when a selling dealer directs a broker’s broker to limit the audience for a bid-wanted, may serve a legitimate purpose. However, as the MSRB noted in a recent letter to the Securities and Exchange Commission’s Investor Advocate, in some cases the practice of filtering could have a negative impact on retail investors, free competition and market efficiency.
“In support of our mission to protect investors, the MSRB monitors market practices such as filtering that may have an adverse impact on retail investors,” said MSRB Executive Director Lynnette Kelly. “Certain credit, legal, regulatory and other legitimate issues can justify filtering by dealers. But since the practice has the potential to negatively affect prices received by retail investors, we think it’s important to remind dealers of their regulatory obligations.”
Today’s regulatory reminder is intended to serve as a compliance resource to assist dealers in assessing their policies and procedures governing when and how to use, review and change filters to ensure compliance with existing regulatory obligations. This reminder does not create new legal or regulatory requirements, but rather summarizes existing guidance for dealers issued in 2012 on MSRB Rule G-43, on broker’s brokers, and MSRB Rule G-30, on prices and commissions, as well as implementation guidance provided in 2015 about MSRB Rule G-18, on best execution, that addressed filtering.
“Dealers have had almost two years to implement and comply with the best-execution rule, which has been an examination priority for enforcement agencies,” Kelly said. “Given the developments in the use of ATSs, it makes sense to remind dealers of the guidance about the appropriate use of filters to help support their compliance with the best-ex rule.”
Date: January 3, 2018
Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org
The Municipal Securities Rulemaking Board (MSRB), the self-regulatory organization that oversees the $3.8 trillion municipal securities market, is accepting applications for its governing board. The Board of Directors sets the strategic direction of the organization, makes policy and regulatory decisions, authorizes market transparency initiatives and oversees MSRB operations. Read the press release. Read the notice.
As the city of Detroit works to rebuild its investor relationships, it got good credit news in the form of a one-notch upgrade from a second rating agency in as many months.
The ratings remain deep in junk-bond territory.
S&P Global Ratings upgraded the city’s issuer credit rating to B-plus from B Dec. 21. The outlook is stable. Moody’s Investors Service upgraded Detroit to B1 from B2 in October.
The S&P upgrade follows the city’s soft launch of a new web portal to improve investor access to its financial data and bond offerings.
“The road to recovery is a long one and I think that Detroit is doing the right things,” said Stephen Winterstein, managing director and chief municipal fixed income strategist at Wilmington Trust Investment Advisors, Inc. “I am really optimistic about what they have been doing in terms of disclosure and the investor website is definitely a move in the right direction.”
Winterstein said that for municipal bond investors the notion of transparency and the ability of local governments to be quick to respond with timely disclosure has become increasingly important.
Government Finance Officers Association best practices recommend that governmental bond issuers consider developing an investor relations program. The centerpiece of such a program is a commitment to provide full and comprehensive disclosure of annual financial, operating, and other significant information in a timely manner consistent with federal, state and local laws.
Detroit’s site is provided through BondLink, an investor relations and disclosure platform for municipal bond issuers.
“We were impressed with the platform and thought it was a good way to increase market understanding of the City’s debt issues that are outstanding,” said John Naglick, Detroit’s chief deputy chief financial officer and finance director. “We did not do it with any particular bond issue in mind, just found that it fits with our desire to be more transparent.”
The city has been slowly returned to the market, but only with paper carrying investment-grade state aid backing.
Since exiting bankruptcy in December 2014 Detroit has tapped the public bond market twice: in August 2015 with $245 million of local government loan program revenue bonds and in August 2016 with a $615 million general obligation/distributable state aid backed bond sale. Both deals were issued through the Michigan Finance Authority.
The 2015 debt was enhanced with a statutory lien and intercept feature on the city’s income taxes, which landed an A rating from S&P Global Ratings. The city also privately placed $125 million to pay for projects aimed at revitalizing the city’s neighborhood commercial corridors.
Naglick said that the city is also close to deciding on the underwriting team for a request for proposals it launched in October to find banks to lead a tender offer and refunding of its unsecured financial recovery bonds with the aim of lowering its costs and easing a future escalation of debt service.
“Disclosure can be the canary in the coal mine,” said Colin MacNaught, CEO & co-founder of BondLink. “If a credit gets distressed, often-times they stop disclosing, or their disclosure is stale. If you have an investor website, you can provide current information on a timely basis, in a very user-friendly format. I think what Detroit’s doing is a big positive step as they rebuild market access.”
Detroit’s investor website lists financial team members, the latest financial reports on the city and district, ratings information, offering documents, and links to information on the Municipal Securities Rulemaking Board’s EMMA website.
“The city is doing a very good job managing the things that are within their control,” said Tom Schuette, co-head of investment research and strategy at Gurtin Municipal Bond Management. “The City’s BondLink disclosure efforts coupled with the recent adoption of a formalized and realistic strategy to handle accelerating pension payments in future years are signs of a management team that appears committed to both prudent, forward-looking fiscal policies as well as going the extra mile in terms of transparency with the investor community. “
S&P, in its upgrade, cited positive momentum the city is building with regard to stabilizing its operations and being better prepared to address future significant increases in pension contributions.
“We believe the city’s financial position is now more transparent compared with recent years, as is Detroit’s long-term financial strategy, which relies on fairly conservative growth assumptions,” S&P said. “We also believe that the city has a stronger capacity to service its debt obligations than in years past.”
In its October upgrade, Moody’s assigned a positive outlook to reflect the possibility of further upward movement if current economic and financial trends persist and enhance the city’s capacity to fund long-term liabilities.
The city’s ratings are the highest since March 2012, before its July 2013 bankruptcy filing. Schuette said the upgrades should help Detroit’s market access and support the city’s assertion that its credit quality is improving.
In December, Moody’s also raised the city’s assigned new Aa2 enhanced ratings to bonds issued by the Michigan Finance Authority and secured by various liens on distributable state aid to the city. All bonds secured by a pledge of the city’s DSA fall under this program. The outlook on the program rating is stable.
Previously, Moody’s (MCO) assigned different underlying ratings to bonds secured by separate liens on Detroit’s DSA. Bonds with a first lien on DSA were rated Aa2. Bonds with second, third and fourth liens were rated Aa3, A1 and A2, respectively. Moody’s (MCO) has withdrawn these underlying ratings and assigned new Aa2 enhanced ratings to all bonds, regardless of lien.
Naglick said the upgrades further reward the purchase decision of holders of the City’s bonds that were issued as part of the 2016 refunding in the summer of 2016.
Schuette said the DSA upgrade should not really change the market’s view of the outstanding bonds.
“There are still different liens to the DSA backed bonds, and the state’s support for some of the liens is still subject to appropriation risk,” said Schuette. “This is why we believe investors need to make sure they understand what they are buying and what risks they are taking on as we do not believe that all of these bonds share the same risk characteristics. If you’re not doing your homework and just relying on the ratings or an assumption that enhancement mechanics will work when you need them then you may be setting yourself up for surprises down the road.”
Positive developments shouldn’t obscure the fact that city’s credit rating remains deep in junk territory and vulnerable to another recession, say market participants.
“We still believe Detroit faces a long path that will require years of prudent decision making from management and the avoidance of major economic shocks before its debt makes sense for investors looking for high-quality municipal exposure.” Schuette said. “The city still has an abundance of extremely high-risk characteristics and speculative-grade qualities that investors should be very cognizant of and understand what they are taking on.”
Detroit’s post-bankruptcy finances have improved to the point where the city may be able to exit state oversight this year. The city has presented deficit-free budgets for two consecutive years and is on the path that would allow it to exit Financial Review Commission oversight. Although the city ended fiscal 2016 with a $63 million surplus its general fund revenues came in lower than anticipated owing to lower than expected intergovernmental aid. The city’s four-year forecast shows an annual growth rate of only about 1%.
The plan to address pension obligations is aimed at shoring up the city’s long-term fiscal health. Detroit developed a long-term funding model with the help of actuarial consultant Cheiron, obtained City Council approval for changes to the pension funding ordinance that established the Retiree Protection Trust Fund, and deposited $105 million into this IRS Section 115 Trust. This fund will grow to over $335 million by 2024 and will provide a buffer to increased contributions beginning then.
Mayor Mike Duggan claimed during his 2016 State of the City speech that consultants who advised the city through bankruptcy had miscalculated the pension deficit by $490 million.
By Nora Colomer
BY SOURCEMEDIA | CORPORATE | 01/02/18 07:05 PM EST
Read about the MSRB’s focus on the year ahead, including tax reform and compliance support in the January Monthly Update.
PHOENIX – The Securities and Exchange Commission’s municipal market enforcement activities in the coming year will focus on offering and disclosure fraud, broker-dealer abuses, municipal adviser misconduct and breaches of fiduciary duty, public corruption, and pay-to-play abuses.
LeeAnn Gaunt, chief of the SEC Enforcement Division’s Public Finance Abuse Unit, cited these priorities when asked about them by The Bond Buyer.
“Our enforcement priorities are a direct reflection of our continuing focus on protecting investors, including the many retail investors who invest in the municipal securities market,” said Gaunt.
Securities lawyers and regulators interviewed by The Bond Buyer said they expect the focus on muni enforcement actions to be on wrongdoing that harms investors. Several sources said they expected to see less of an emphasis on technical errors or smaller transgressions.
John Grugan, a partner at Ballard Spahr in Philadelphia, said he expects to see the SEC pivot away from the “broken windows” enforcement approach that characterized the commission during Mary Jo White’s tenure as chair between April 2013 and January 2017.
White explained the “broken windows” concept in a speech in 2013, saying it’s important to punish small transgressions to send a message that lawlessness of any kind will not be tolerated.
Current chair Jay Clayton replaced her in May. Grugan said he expects the SEC’s emphasis going forward to be on fewer, but higher quality, enforcement cases.
“I think that they intend to look at if there are systemic issues that allow investors to be taken advantage of,” he said.
Grugan pointed to the Municipalities Continuing Disclosure Cooperation initiative, an effort that wrapped up in late 2016. The MCDC program offered issuers and underwriters reduced settlement terms for self-reporting instances in which issuer’s offering documents were not truthful about their continuing disclosure history.
Some lawyers criticized the MCDC for focusing heavily on “foot faults,” Grugan said, adding that it doesn’t seem as if the SEC is making a concerted effort to go after more issuers and underwriters for similar conduct.
“I think that their focus is receding and it is returning to the types of cases that they historically have brought,” said Grugan, such as misuses of funds, rather than the “technical violations” of the MCDC.
“By no means is the SEC retreating from enforcement, I just think their priorities are changing,” he said.
Paul Maco, a partner at Bracewell in Washington DC, also said he believes the enforcement division has moved on.
“One thing that might be fading into the shadows, if not going away, is the ‘broken windows’ concept,” he said.
“I think the focus will be continued on serious disclosure problems,” he added. “Where there are serious concerns, you’ll see them looking for serious remedies.”
Clayton’s testimony before Congress earlier this year indicated that he is interested in punishing individual bad actors so market participants should not be surprised to see a continued emphasis on enforcement actions against individuals in the coming year, Maco said.
Ernie Lanza, a senior counsel at Clark Hill in Washington, said the SEC is placing more and more emphasis on data-driven enforcement, using the analytical tools at its disposal to guide its actions. Lanza said he sees a slowdown in SEC enforcement, but that it will still make its presence felt.
“There’s always going to be a baseline level of enforcement,” Lanza said.
Robert Doty, the president and proprietor of municipal bond consulting firm AGFS in Annapolis, Md., said the new SEC chairman has not yet tipped its hand on a particular focus.
The commission had been operating for months with only three commissioners: Clayton, Michael Piwowar, and Kara Stein. The first two are Republicans and Stein is a Democrat. The Senate has only just confirmed on Dec. 21 George Mason University senior research fellow Hester Peirce, a Republican, and lawyer Robert Jackson, a Democrat, to fill the other two slots. After their swearing in, the two will likely need a little time to get up to speed.
“We don’t know what will happen as the new commissioners sink their teeth into things,” Doty said.
Doty said he doesn’t think enforcement will be “as surprising” in 2018 as it was the past year, but that he thinks there is a particular area where there could be a focus.
“Municipal advisor enforcement is a story to watch,” he said.
Muni advisors have spent much of the past several years adjusting to being regulated under an entirely new regime arising out of the Dodd-Frank Act. For MAs who are not also broker-dealers it has been their first experience being regulated at all.
The Municipal Securities Rulemaking Board’s Rule G-42 on the duties of non-solicitor municipal advisors only became effective in June 2016. There is a sense among the MA community that the SEC and the Financial Industry Regulatory Authority, which also enforces MSRB rules, spent 2017 getting a sense of the MA space and exploring the effects of those rules.
Doty said that in his view, the SEC has been very patient in advising the MA community with respect to regulatory compliance. “At some point that approach may give way to a more strict approach, especially where more egregious violations are found,” Doty said.
Doty added that the fiduciary duty owed by municipal advisors to issuers and other municipal entity clients could be a source of enforcement actions in the new year. The fiduciary duty is a strict standard requiring MAs to put the interests of their clients above their own. Doty said that while many MAs understand the fiduciary duty and act accordingly, he believes many MAs may not fully understand the weight of being a fiduciary.
“That will probably give some room for enforcement against municipal advisors,” he said.
By Kyle Glazier
BY SOURCEMEDIA | MUNICIPAL | 12/26/17 07:21 PM EST
Ex-housing official claims Nov. 7 ballot omitted key facts
Mayor Sylvester Turner misled voters into approving a $1 billion pension bond referendum last month, a new lawsuit alleges, claiming that city officials plan to use the bonds’ passage to sidestep a voter-approved limit on the property tax revenue Houston can collect.
Turner’s office flatly denied that reading of the Proposition A ballot language, calling the wording “boilerplate” and saying the city has not and will not sidestep the revenue cap as a result of the vote on the mayor’s landmark pension reform package or any of the prior bond issuances that included the same phrasing.
A local businessman and former Houston housing department director, James Noteware, sued the city Friday in state district court, contesting the Nov. 7 election on the grounds that the ballot language was “materially misleading.”
The full language, rather than the summary listed for voters on the ballot, stated that the taxes levied to repay the bonds would not be “limited by any provision of the city home rule charter limiting or otherwise restricting the city’s combined ad valorem tax rates or combined revenues from all city operations.”
The suit claims that phrasing means the taxes levied to pay for the bonds will be exempted from the 13-year-old revenue cap, which limits the annual growth of property tax revenue to the combined rates of inflation and population growth, or 4.5 percent, whichever is lower.
“Omitting the fact that the proposition created a billion-dollar exception to default limits on the city’s taxing authority renders the proposition materially misleading and void,” the suit states.
“If the intent is to have more flexibility to raise property tax revenues, they should have just come right out and asked for it,” Noteware said Monday.
Turner’s spokesman, Alan Bernstein, said that is not the city’s intent. Moreover, he said, the city charter requires Houston to pay its debts first before allocating any funds to operations.
‘Baseless bombs’
“The suit is factually and legally baseless and from a taxpayer policy viewpoint completely illogical, as disrupting the pension reform will cost taxpayers more money,” Bernstein said. “There was never any intent to avoid the revenue cap nor are there any facts indicating that we would. It is easy to throw baseless bombs. The price of doing so for the plaintiff and his lawyer is far less than the harm he is trying to inflict on taxpayers.”
The language in question simply is intended to assure potential bondholders that the city will meet its obligations, Bernstein said.
Benefit cuts at stake
Regardless of whether Turner intends to step outside the revenue cap, Noteware’s attorney, Jerad Najvar, said, the phrasing of the ballot language would let a future mayor do so.
“I see why the mayor is saying, ‘Don’t worry, we’re never going to use this,’ but nonetheless it’s there,” Najvar said Monday. “If this election was valid, then this builds in the authority that the city did not have before to go around that revenue limitation. If the election is going to be challenged, it has to be done right now.”
Noteware said he views the pension reform package as inadequate and would not be concerned if his lawsuit winds up scuttling the deal.
The legislation that enacted the reforms requires the city to send the bond proceeds to the police and municipal pension funds this spring. If it does not, up to $1.8 billion of the $2.8 billion in benefit cuts in the reform package will be rescinded, adding tens of millions of dollars in costs to the city budget overnight.
The pension bonds are scheduled to be sold this week in New York; Bernstein said as of Monday it did not appear that process would be disrupted by the lawsuit.
Najvar said selling the bonds when a judge may decide Houston lacks the authority to do so would be “the height of irresponsibility.”
Voters tweaked the revenue limitation in 2006, allowing the city to raise an additional $90 million for public safety spending, but Houston exhausted that breathing room in 2014. With property values continuing to rise, the city has trimmed its tax rate each fall since then to avoid collecting more revenue than allowed.
City officials tweaked the cap in 2015 and 2016, invoking flooding disaster declarations to collect a combined $22 million in those two years on top of what the revenue limit otherwise would have dictated, in keeping with an exception clause in the cap’s wording. City Council voted down Turner’s attempt to do so again this fall after Hurricane Harvey.
Meant as incentive
The bonds are part of Turner’s landmark pension reform plan, which recalculates the city’s payments to erase a debt of more than $8 billion debt over three decades, cuts benefits by $2.8 billion and includes a mechanism to cap Houston’s future pension costs.
Turner offered to issue the $1 billion in bonds as an incentive to get the police and municipal pension systems to agree to another round of benefit cuts and to bolster both plans’ funding levels. The police plan would get $750 million of the bonds and the municipal fund would get $250 million.
Courts twice ruled the city had used misleading ballot language under Turner’s predecessor, Annise Parker, in connection with elections in 2010 and 2015.
The Houston Chronicle
By Mike Morris
December 18, 2017
Washington, DC – The Municipal Securities Rulemaking Board (MSRB) received approval from the Securities and Exchange Commission to amend MSRB Rule G-34, on obtaining CUSIP numbers. The amended rule, effective June 14, 2018, reflects the MSRB’s long-standing interpretation that municipal securities dealers acting as placement agents in private placements of municipal securities, including direct purchase transactions, must obtain a CUSIP number.
Additionally, the amendments extend to non-dealer municipal advisors the requirement that a municipal advisor obtain a CUSIP number when advising on a competitive transaction in municipal securities.
“Clarifying who must obtain CUSIP numbers for which types of transactions aligns the rule with current market practices,” said MSRB Executive Director Lynnette Kelly. “In the case of private placements, our goal is to provide greater transparency of transaction details if the securities do later trade in the secondary market.”
As a result of multiple periods of public comment, the final rule amendments incorporate a principles-based exception from the requirement to obtain CUSIP numbers when the dealer (or municipal advisor in a competitive sale) reasonably believes the purchaser’s present intent is to hold the municipal securities to maturity or earlier redemption or mandatory tender. To rely on the exception, the purchaser may be a bank, control affiliate of a bank or consortium of these entities, or a municipal entity that meets certain criteria under the rule (e.g., a state revolving fund or bond bank).
“Ultimately, the MSRB’s participatory rulemaking process has resulted in an appropriately tailored rule that supports market transparency while accommodating those instances when there is little risk of a security later trading in the secondary market,” Kelly said.
Date: December 15, 2017
Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org
Norwalk, CT—December 15, 2017 — The Board of Trustees of the Financial Accounting Foundation (FAF) today announced the appointment of five new members of the Governmental Accounting Standards Advisory Council (GASAC).
In addition to the new appointees, the FAF Trustees reappointed eight GASAC members—including appointing current GASAC member Alan Skelton as vice chairman.
The GASAC advises the Governmental Accounting Standards Board (GASB) on strategic and technical issues, project priorities, and other matters that affect standards setting. The GASAC provides the GASB with diverse perspectives from individuals with varied business, governmental, and professional backgrounds.
“We are pleased to welcome our new GASAC members, and look forward to their input on important accounting and financial reporting issues,” said GASB Chairman David A. Vaudt. “We also thank our departing members for volunteering their time and providing their insights to help the GASB improve financial reporting for all of our stakeholders.”
The new GASAC members will serve two-year terms beginning January 1, 2018, and are eligible to be reappointed for up to two additional consecutive terms. They are:
Four members will depart from GASAC on December 31, 2017: Vice Chairman Jacqueline Reck, Daniel Smith, Stephen Klein, and Charles Tegen.
For a full listing of current Council members, visit the GASAC webpage.
About the Financial Accounting Foundation
Established in 1972, the Financial Accounting Foundation (FAF) is the independent, private-sector, not-for-profit organization based in Norwalk, Connecticut responsible for the oversight, administration, financing, and appointment of the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB). The FASB and GASB establish and improve financial accounting and reporting standards—known as Generally Accepted Accounting Principles, or GAAP—for public and private companies, not-for-profit organizations, and state and local governments in the United States. For more information, visit www.accountingfoundation.org.
About the Governmental Accounting Standards Board
Established in 1984, the GASB is the independent, private-sector organization, based in Norwalk, Connecticut, that establishes financial accounting and reporting standards for U.S. state and local governments that follow GAAP. These standards are recognized as authoritative by state and local governments, state Boards of Accountancy, and the American Institute of CPAs (AICPA). The GASB develops and issues financial accounting standards through a transparent and inclusive process intended to promote financial reporting that provides useful information to taxpayers, public officials, investors, and others who use financial reports. The Financial Accounting Foundation (FAF) supports and oversees the GASB. For more information, visit www.gasb.org.
NEW YORK — A former elected official of a New York City suburb was sentenced to 2-1/2 years in prison on Wednesday following his conviction in what U.S. prosecutors have called the first criminal securities fraud case brought over municipal bonds.
Christopher St. Lawrence, who was supervisor of Ramapo, New York, was sentenced by U.S. District Judge Cathy Seibel in White Plains, New York, federal prosecutors announced. St. Lawrence, 67, was found guilty by jurors in May of securities fraud, wire fraud and conspiracy.
Michael Burke, a lawyer for St. Lawrence, could not immediately be reached for comment.
Prosecutors charged St. Lawrence in April 2016 along with Aaron Troodler, former executive director of the town-owned Ramapo Local Development Corp.
Prosecutors said Ramapo and the corporation sold more than $150 million of bonds while Troodler and St. Lawrence concealed the town’s deteriorating finances, putting millions of dollars in fake receivables on its books.
The town’s financial woes were largely due to a $58 million minor league ballpark project, prosecutors said. The park is home to the Rockland Boulders.
Ramapo residents had rejected a plan to guarantee bonds used to finance the park in a 2010 referendum, and St. Lawrence told residents that no public money would be used for the project. However, Ramapo ended up paying more than half the cost, according to prosecutors.
Troodler pleaded guilty in March.
In May 2016, after the charges were filed, Moody’s Investors Service downgraded the town’s outstanding bonds two notches to A3, still in the investment-grade category. In February, Moody’s withdrew its rating because the town did not file audited financial statements.
The town, which is 28 miles (45 km) northwest of New York City and had 126,595 residents as of the 2010 U.S. census, has said it significantly reduced its debt, and cut its exposure to the development corporation by 62 percent as of Dec. 31, 2016.
The criminal case followed U.S. regulators’ push in recent years to crack down on fraud in the U.S. municipal bond market through civil actions.
The latest such case came earlier this month when the U.S. Securities and Exchange Commission charged Oyster Bay, New York, and former town supervisor John Venditto with defrauding municipal bond investors by concealing side deals with a local restaurateur.
Marc Agnifilo, a lawyer for Venditto, declined to comment on that case. Venditto previously pleaded not guilty in a related criminal case.
By REUTERS
DEC. 13, 2017, 5:39 P.M. E.S.T.
(Reporting By Brendan Pierson in New York; Editing by Jonathan Oatis)
The Securities and Exchange Commission (SEC) recently approved the Municipal Securities Rulemaking Board’s (MSRB) amendment to Form G-45, under MSRB Rule G-45, about reporting information on municipal fund securities. The amended form will collect additional data regarding transactional fees assessed by ABLE programs and 529 college savings plans. The amendments will be effective as of June 30, 2018.
PHOENIX – The Securities and Exchange Commission has granted approval to a Municipal Securities Rulemaking Board proposal to refine the data it collects regarding the investment options offered in certain municipal fund securities.
The MSRB announced late last week that the SEC had approved the proposal, which would amend electronic Form G-45 under MSRB Rule G-45 on reporting of information on municipal fund securities. The change will result in the board collecting two new data points about investment options in 529 college savings plans as well as Stephen Beck, Jr., Achieving a Better Life Experience Act of 2014 (ABLE) programs.
The form amendments will become effective on June 30, 2018.
The MSRB went out for industry comment with the proposal in August, and at that time it was more ambitious. The original proposal would have asked underwriters to provide data about four facets of these funds: program management fees, investment option closing dates, benchmark return percentages, and performance by asset class.
However, the MSRB decided at its quarterly board meeting in October to send the SEC a more limited proposal to collect information only about the program management fees and investment option closing dates. Industry feedback indicated that providing the other data would have been too burdensome.
Even with the more limited proposal that was approved by the SEC, Leslie Norwood, a managing director, associate general counsel, and co-head of municipal securities at the Securities Industry and Financial Markets Association, said that SIFMA was disappointed. SIFMA had told the commission that reporting additional information would be burdensome, and that underwriters should be allowed to provide on form G-45 a link to the program documents because much of the information being sought is disclosed there.
“SIFMA is disappointed that its comments from the industry were dismissed, Norwood said. “SIFMA and its members continue to believe that this rule change makes the underwriters of ABLE plans responsible for information not within their direct custody and control, increases costs for ABLE plan investors and increases the gap in the regulatory paradigm for direct sold plans versus dealer sold plans.”
The MSRB first began collecting data about college savings plans in 2015 and will begin collecting data about ABLE programs in 2018. The data the MSRB collects is not publicly-available.
The board has said it is making this change to allow it to make a more effective “apples-to-apples” comparison between college savings and ABLE plans administered by different underwriters. As of right now they don’t all report information the same way. For example, while underwriters are required to report their program management fees, some underwriters lump this amount in with other expenses and make it difficult to identify the management fee itself. There are also differences in ABLE fees based on state residency, the MSRB found.
The board will be collecting information on many other fees charged by plan administrators, such as fees for opening accounts or for foreign transactions.
“The MSRB and other regulatory authorities may use this data to analyze 529 college savings plans and ABLE programs, monitor their growth rate, size and investment options, and compare 529 college savings plans and ABLE programs based on fees, costs and performance,” the board said in its notice announcing SEC approval.
By Kyle Glazier
BY SOURCEMEDIA | MUNICIPAL | 12/11/17 07:10 PM EST
CHICAGO (Reuters) – Potential U.S. tax law changes are spurring so many municipal debt issuers to come to market before year-end that a number of deals are being expedited through private debt sales, creating a disclosure gap that leaves investors in the dark.
While private muni deals have existed for years, legislation in the U.S. Congress to end tax breaks for private activity and advance refunding bonds starting in 2018 has ballooned the volume of these transactions.
States, cities, schools, hospitals and other issuers sold $15.2 billion of debt in the market the week of Nov. 26, $21.33 billion last week, and will sell an estimated $22.88 billion this week, according to Thomson Reuters data.
But billions of dollars of additional debt is being sold outside of the market through private transactions.
Unlike publicly sold debt, these deals are not subject to mandatory disclosure. Unless privately sold debt and its terms and conditions are voluntarily disclosed, the issuer’s current and prospective investors may not know it exists.
The debt could have a “detrimental impact” on how investors view an issuer’s credit quality, according to Richard Ciccarone, president and CEO of Merritt Research Services, which provides data and research on muni bonds.
“We don’t know what we should know,” he said.
The Municipal Securities Rulemaking Board (MSRB), the self regulator of the $3.8 trillion market, has been advocating for bank loans and other private deals to be disclosed on its EMMA website. This is where information about publicly sold deals, including pricing, trading data and issuer financial reports and material events, is posted.
“If you were a bondholder wouldn’t you want to know the debt profile of the issuer?” said MSRB Executive Director Lynnette Kelly, adding that private transactions could contain priority of payment and other provisions that trump those of an issuer’s public debt.
“Those are exactly the reasons and many more the MSRB board chose to speak out on this issue,” she said.
Voluntary disclosure of these deals has been “pretty minimal,” according to Kelly.
John Bonow, CEO of Public Financial Management, a municipal finance advisory firm, estimated last week that the amount of bonds currently being directly purchased by banks or temporarily sold to underwriters in lieu of a public offering could equal the amount of public debt transactions in the market.
On Thursday, the Illinois Finance Authority, a big conduit issuer of private activity bonds for nonprofit hospitals, colleges and other entities, approved nearly $1.2 billion of bonds in seven deals, with $625.5 million of that debt bypassing the market and headed straight to banks.
A proposed rule pending before the U.S. Securities and Exchange Commission since March, would make private debt and loan transactions subject to the MSRB’s disclosure requirement.
“There’s been a fair amount of push back because it’s so broad,” said Roger Davis, a partner in the San Francisco office of bond counsel Orrick, noting the rule could capture ordinary governmental functions.
by Karen Pierog
Reporting By Karen Pierog; Editing by Daniel Bases and Andrew Hay
DECEMBER 15, 2017
The Municipal Securities Rulemaking Board (MSRB) received approval today from the Securities and Exchange Commission (SEC) to amend Form G-45 under MSRB Rule G-45, on reporting of information on municipal fund securities. The MSRB amended Form G-45 to collect data about transactional fees primarily assessed by programs established to implement Stephen Beck, Jr., Achieving a Better Life Experience Act of 2014 (ABLE) programs. In addition, amended Form G-45 will require an underwriter to disclose any variance in the account maintenance fee due to the residency of the account owner. The amendments, effective June 30, 2018, will help the MSRB receive more reliable, complete and accurate information about ABLE programs and 529 college savings plans.
To facilitate compliance with these changes, the MSRB will be making both amended Form G-45 and an updated Form G-45 manual available, and will make future announcements regarding those materials.
On December 1, SIFMA submitted comments to the Securities and Exchange Commission (SEC) on proposed amendments to MSRB Rule G-34, on obtaining CUSIP numbers, which aim to clarify existing requirements and improve market consistency. SIFMA reiterated its concerns about the scope of the exception and urged the SEC to institute disapproval proceedings regarding the Proposal in its current form.
It’s here! The MSRB’s first Compliance Corner newsletter for municipal bond dealers and municipal advisors has all the latest compliance resources, upcoming compliance dates and more.
The NFMA’s newsletter, the Municipal Analysts Bulletin, is posted.
To read the newsletter, click here: Vol. 27, No. 3.
The Municipal Securities Rulemaking Board (MSRB) today announced that it is extending the deadline for public comment on its approach to compliance support to February 9, 2018.
“The MSRB recognizes that in light of the current focus on Congressional tax reform proposals and year-end schedules, additional time will enable our stakeholders to provide more thoughtful and comprehensive responses on how the MSRB can deliver the most impactful compliance support,” said MSRB Executive Director Lynnette Kelly. “The purpose of the request for comment is to jumpstart a long-term dialogue with stakeholders on how the MSRB can most effectively facilitate compliance. We welcome preliminary input to help us begin to focus our efforts.”
The MSRB first announced its long-term strategic focus on compliance in June 2017 and has since established a Compliance Advisory Group, launched an online Compliance Center and developed a series of virtual compliance workshops, among other activities to support understanding of MSRB rules.
“Continued input from stakeholders is essential to assisting the MSRB in prioritizing, developing and delivering compliance resources that are responsive to the market’s needs,” Kelly said.
This holiday season, make sure you are aware of limitations on gifts or gratuities in relation to municipal securities or municipal advisory activities by exploring the Municipal Securities Rulemaking Board’s MuniEdPro® course, Gifts, Gratuities, Non-Cash Compensation and Expenses of Issuance: MSRB Rule G-20.
The course uses common scenarios to illustrate compliance with limitations and exclusions on the value of gifts and gratuities that regulated entities and their associated persons can give to officials of a bond issuer. The course also addresses restrictions related to expenses of issuance.
At the end of the course, the learner will be able to:
Dealer and municipal advisor firms: enhance your firm’s compliance program by offering your municipal finance professionals access to all MuniEdPro® courses at the discounted rate of $100 per person. The discounted rate, which is available through December 31, 2017, is a $270 value per person, saving firms over 60 percent on the course catalog.
For more information about MuniEdPro® or to inquire about subscription options, contact Ritta McLaughlin at rmclaughlin@msrb.org or 202-838-1306.
The town of Ramapo and its local development corporation have consented to an SEC agreement to clean up how they issue municipal bonds.
Though they did not explicitly admit wrongdoing, by agreeing not to violate U.S. Securities and Exchange Commission laws they tacitly acknowledged they had done so.
The SEC civil case coincides with federal criminal charges filed last year against town officials for concealing financial problems and lying to bond investors.
Christopher St. Lawrence, former town supervisor, was found guilty after a four-week spring trial of conspiracy, securities fraud and wire fraud. Nachman Aaron Troodler, a former town attorney, pleaded guilty to fraud.
They fabricated Ramapo’s financial reports to help sell municipal bonds, according to court documents, and to help pay for Provident Bank Park, a minor league baseball stadium.
Taxpayers had rejected a proposal to finance the stadium in 2010, and St. Lawrence pledged that it would be built with private funds. But in 2011 the development corporation issued a $25 million bond for construction, and the town ended up paying more than half of the $58 million project.
The stadium is now known as Palisades Credit Union Park and is the home of the Rockland Boulders.
For six years, Ramapo reported general fund balances ranging from $1.4 million to $4.1 million. But the fund was actually running deficits of $249,000 to $13.9 million.
General fund balances were distorted with phony receivables, concealed liabilities and improper fund transfers.
St. Lawrence, for instance, claimed that Ramapo was going to get $3.1 million in Federal Emergency Management Agency reimbursements for expenses from Hurricane Irene, even though no claims had been submitted.
The town had guaranteed bond payments, so fake fund balances made the bonds appear less risky. Investors also were told that revenues from the stadium and a housing project would cover the bonds’ principal and interest.
The SEC said St. Lawrence lied to investors to conceal the town’s deteriorating finances and to disguise the inability of the development corporation to make payments from its own money.
Federal Judge Cathy Seibel issued a judgment on Nov. 17 that requires Ramapo and its development agency to hire a court-approved independent consultant to review financial procedures and controls. The consultant may employ accountants, attorneys, forensic experts or business advisers to assist with the review.
The consultant will recommend improvements and Ramapo must adopt changes.
The town and its agency must also hire an independent auditing firm to examine financial statements for 2017 through 2019.
If they decide to issue new bonds in the next three years, they must hire an independent counsel who will investigate the accuracy and completeness of disclosure documents.
In three years, they must certify that they have complied with all requirements of the judgment.
The criminal sentencing hearing for St. Lawrence of Wesley Hills, began on Monday and will continue tomorrow. Troodler of Bala Cynwyd, Pennsylvania, is scheduled to be sentenced on Dec. 12.
westfaironline.com
By Bill Heltzel – November 28, 2017
The special purpose districts that have powered development in the Cinco Ranch area west of Houston repeatedly failed to disclose to bond investors the risk of severe flooding from the adjacent Barker Reservoir, a Houston Chronicle investigation found.
Hundreds of homes near the reservoir were flooded when Hurricane Harvey battered southeast Texas in late August. Many homeowners complained bitterly that they were never warned the reservoir could pour into their neighborhoods during an extreme storm.
Bond investors who placed bets on the long-term economic health of the Cinco Ranch area were not told about the danger, either – although it had been documented for years in Fort Bend County planning records and in reports by the U.S. Army Corps of Engineers, which operates the reservoir.
The Houston Chronicle
By James Drew
November 24, 2017
NEW YORK/WASHINGTON — The U.S. Securities and Exchange Commission on Tuesday charged Oyster Bay, New York and former town supervisor John Venditto with defrauding municipal bond investors by concealing side deals with a local restaurateur.
Prosecutors also added 21 new criminal charges, including securities and wire fraud, to an indictment against Venditto, who had originally been charged with corruption in October 2016, along with Nassau County Executive Edward Mangano.
That case revolved around dealings involving Mangano, Venditto and the restaurateur, identified in court papers as Harendra Singh, who was charged in a separate federal case in September 2015.
All have pleaded not guilty. Their lawyers did not immediately respond to requests for comment.
Venditto, 68, of Massapequa, invoked his constitutional right against self-incrimination and declined to testify to SEC staff, according to the SEC’s civil complaint.
His criminal case is among the first alleging securities fraud in connection with municipal bond sales.
In what authorities have called the first case of that type, Christopher St. Lawrence, the elected supervisor of Ramapo, New York, was convicted on May 19 in connection with a baseball stadium financing.
The SEC said Oyster Bay and Venditto concealed from investors in 26 securities offerings from August 2010 to December 2015 how the town had agreed to indirectly guarantee four private loans worth more than $20 million to Singh.
According to the SEC, the decision “to go to such great lengths” to help Singh, identified as the “concessionaire” in its complaint, stemmed from his “long and close relationship” with town and county officials, involving gifts, bribes, kickbacks and political support.
The SEC said the guarantees would have been material to investors because of their potential financial impact, including a possible $16 million payout, or 16 percent of Oyster Bay’s operating budget, in 2013 in the event of a default.
Oyster Bay comprises 36 villages and hamlets, and has close to 300,000 people.
“Oyster Bay and its most senior elected official concealed from its municipal investors that the town had gone to great lengths and taken on financial risk in an unusual decision to assist a vendor,” Sanjay Wadhwa, senior associate director of the SEC’s office in New York, said in a statement.
Mangano, a Republican, will end eight years as Nassau County executive at the end of December.
He did not seek re-election, and along with Venditto faces a possible trial in January, court records show. Mangano’s wife Linda was also indicted.
The SEC case is SEC v Town of Oyster Bay, New York et al, U.S. District Court, Eastern District of New York, No. 17-06809. The criminal case is U.S. v. Mangano et al in the same court, No. 16-cr-00540.
By REUTERS
NOV. 21, 2017, 3:36 P.M. E.S.T.
(Reporting by Jonathan Stempel and Mohammad Zargham; Editing by Tom Brown)
SEC says Oyster Bay failed to tell bondholders about private loan deals
The Securities and Exchange Commission on Tuesday charged the Long Island town of Oyster Bay with defrauding bondholders by failing to tell them about four private loan deals.
The charges come during a multiyear push by the SEC to improve the information local governments give bondholders. Last year, 71 municipal borrowers from Minnesota to Hawaii agreed to stricter disclosure practices as part of an agreement with the SEC.
Tuesday’s SEC complaint alleges that Oyster Bay didn’t inform investors in the town’s bonds that it had agreed to indirectly guarantee $20 million in private loans to a local vendor who owned and operated restaurants at town facilities. The SEC also charged John Venditto, who served as Oyster Bay’s supervisor and treasurer from 1998 through January of this year, with defrauding the bondholders.
Though the terms of the four private loans could have forced Oyster Bay to make a $16 million payment on short notice, using up 16% of its operating budget, the town didn’t disclose these loans to investors in bonds sold between August 2010 and December 2015, the SEC said.
“Oyster Bay and its most senior elected official concealed from its municipal investors that the town had gone to great lengths and taken on financial risk in an unusual decision to assist a vendor,” Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, said in a press release. ”Investors were deprived of information they needed to understand the town’s true financial condition as they made investment decisions.” The terms of the loans were also concealed from some town finance officials, according to the complaint.
The town of Oyster Bay said in a submission to the SEC earlier this year that the town had been “victimized” and that new loan terms were inserted into the town’s agreement with the vendor without the town board’s knowledge. It noted that a 2016 indictment against Mr. Venditto alleges he accepted bribes from the vendor.
“It is paradoxical to claim that the town should have disclosed illegal agreements that were entered into in secret and were unknown to and concealed from the town board,” Oyster Bay said in its response to a so-called Wells notice from the SEC informing the town of a pending enforcement action.
Town attorney Joseph Nocello said he didn’t want to comment on pending litigation, especially litigation pertaining to a previous administration, except to say that the Wells submission contains the town’s “expensive and formal” response to the charges.
An attorney representing Mr. Venditto in connection with the 2016 indictment didn’t immediately respond to a request for comment. Mr. Venditto declined to testify before the SEC, invoking his Fifth Amendment right against self-incrimination, according to the complaint.
The SEC is asking the courts to appoint a monitor to oversee its disclosure practices for five years and prohibit Mr. Venditto, 68 years old, from being involved in bond sales. The SEC also wants Mr. Venditto and the town to pay monetary penalties, according to the complaint. It didn’t say how much money.
The complaint was filed U.S. District Court for the Eastern District of New York. The U.S. Attorney’s Office for the Eastern District of New York also filed securities fraud charges against Mr. Venditto Tuesday.
Government borrowers file information about their finances at the time they issue bonds and on a continuing basis while the bonds are outstanding. The records are posted on the Municipal Securities Rulemaking Board’s website. Since 2014, the SEC has been involved in a campaign to improve disclosure in the municipal market.
The Wall Street Journal
By Heather Gillers
Nov. 22, 2017 1:35 p.m. ET
Write to Heather Gillers at heather.gillers@wsj.com
The city of Oyster Bay, New York, and its former supervisor were sued by the Securities and Exchange Commission for failing to disclose that the municipality guaranteed loans for a local restaurant owner who allegedly lavished officials with cash, trips and other bribes.
The Long Island city defrauded bondholders by failing to reveal that it co-signed for $20 million of loans for the unidentified businessman, according to the SEC. The agency said Tuesday that the obligations should have been disclosed to investors, given that the loans could have eaten up nearly a fifth of its annual budget.
“Oyster Bay and its most senior elected official concealed from its municipal investors that the town had gone to great lengths and taken on financial risk in an unusual decision to assist a vendor,” Sanjay Wadhwa, senior associate director of the SEC’s New York office, said in a statement. “Investors were deprived of information they needed to understand the town’s true financial condition.”
In return for the loan guarantees, the SEC said the businessman provided city officials with free meals, cash and other gifts, including overseas trips to Italy, India, South Korea and Mexico.
The former Oyster Bay supervisor, John Venditto, pleaded not guilty after he was charged last year by federal prosecutors in a related corruption case along with the Nassau County Executive Edward Mangano and his wife, Linda, according to the New York Times. Venditto was named in a superseding indictment Tuesday that included charges of securities fraud, as well as bribery and obstruction of justice.
Marc Agnifilo, an attorney with Brafman & Associates who is representing Venditto, said his client denies the charges. “It doesn’t really change the complexion of the case at all,” Agnifilo said. “I don’t see any new facts of any note.”
Jonathan Pickhardt of Quinn Emanuel Urquhart & Sullivan, the defense attorney for the town listed on the SEC’s statement, did not immediately respond to an emailed request for comment and a phone message left with his assistant.
Debt issued by Oyster Bay, a collection of villages with some 300,000 residents and one-time home to President Theodore Roosevelt, had an AAA rating at the time of the guarantees, according to the SEC. That rating has since tumbled, with S&P Global Ratings dropping it to junk last year because of a history of running budget deficits.
Bloomberg
By Rebecca Spalding
November 21, 2017, 11:35 AM PST Updated on November 21, 2017, 12:37 PM PST
PHOENIX – Dealers and municipal advisors don’t believe that the Municipal Securities Rulemaking Board’s rules on primary offering practices require much of an overhaul and are concerned the MSRB may be proposing to exceed its authority, they told the board this week.
Various market participants voiced these thoughts in comments responding to the MSRB’s September concept release seeking market input on numerous aspects of primary offering practices.
Concept releases are often precursors to proposed rules or rule changes. Market groups had initially said they were uncertain what the MSRB’s goals might be. The concept release potentially affects Rules G-11 on primary offering practices and G-32 on disclosures in connection with primary offerings.
The dealers and muni advisors bound by the MSRB’s rules told the board the proposals contained in the release aren’t necessary or perhaps even within the board’s authority. The board asked, for example, whether it should amend G-11 to require members of syndicates to make a bona fide public offering of the bonds allocated to them at the public offering price. Syndicate members sometimes agree to this in documents signed before the sale, but do not always follow through on it.
Leslie Norwood, a managing director, associate general counsel and co-head of municipal securities at the Securities Industry and Financial Markets Association, wrote that underwriters must abide by their agreements but that the MSRB should not create a new requirement.
“SIFMA strongly believes that the issuer has the right to determine whether it wants its new issue to be sold in a bona fide public offering or by some other means,” Norwood wrote, noting that SIFMA is concerned that such a rule would require “line drawing” to account for instances where a bonafide public offering would be inappropriate, such as in a private placement or limited offering.
“Any such line-drawing raises the considerable risk of regulations driving market decisions rather than the intentions of the party or free market forces,” Norwood wrote.
MAs took issue with the MSRB’s question of whether it should require the submission of preliminary official statements to EMMA, which some issuers already submit voluntarily.
“We believe that the MSRB lacks the statutory authority to create such a rule for either municipal advisors or broker/dealers and that such a requirement would violate the Securities Exchange Act” of 1934, wrote National Association of Municipal Advisors executive director Susan Gaffney. Section 15B(d) of that law specifically denies the board the power to require that, Gaffney argued.
The National Federation of Municipal Analysts, however, said it supports requiring issuers to post the POS. The NFMA also threw its support behind another one of the concept release’s proposals: requiring underwriters in an advance refunding deal to disclose within a shorter timeframe, and to all market participants at the same time, the CUSIPs refunded and the percentages.
“We believe the most effective and least costly solution to ensure that all investors have equal access to refunded CUSIP information is the disclosure of all credit and security information to EMMA at the same time, as soon as practicable,” wrote NFMA chair Julie Egan and the group’s industry practices & procedures chair Lisa Washburn.
SIFMA generally also said it doesn’t see a need for a new MSRB requirement for the senior syndicate manager to inform all other syndicate members simultaneously when a bond purchase agreement is executed, and explicitly state that, in negotiated sales, retail or institutional priority orders must be allocated up to the amount of priority set by the issuer before being allocated to lower priority orders.
Robert Doty, the president and proprietor of muni bond consulting company AGFS told the board that it should amend G-32 to require a dealer that sells any offered municipal securities to a customer to disclose all of its compensation in a negotiated offering that is dependent upon the completion of either specific stages in an offering or the entire offering. Doty noted that undisclosed compensation based on specific stages of the transaction were key pieces of a 2016 Securities and Exchange Commission enforcement action against the Rhode Island Economic Development Corporation and Wells Fargo (WFC), in which the commission alleged a conflict of interest that should have been disclosed to bond investors.
The MSRB can choose to ask for additional market comments, propose rules or rule changes for further comment, file proposals with the SEC, or take no further action.
BY SOURCEMEDIA | MUNICIPAL | 11/16/17 07:15 PM EST
By Kyle Glazier
The MSRB has released for comment its concept proposal on MSRB rules on primary offering practices. The BDA’s letter suggests that existing MSRB rules adequately protect primary offering practices and the existing regulatory framework is sufficient, thus eliminating the need for new rules to govern primary offering practices. Public comments on the proposal are due Monday, November 13th.
BDA’s comment letter can be found here.
Draft Letter Summary:
Rule G-11 Primary Offering Practices
Rule G-32 Disclosures in Connection with Primary Offerings
Proposed Rule Summary:
MSRB’s request seeks insight on evolving primary offering practices and whether current rules continue to operate effectively or whether changes to MSRB Rule G-11, on primary offering practices, and Rule G-32, on disclosures in connection with primary offering practices.
Concerning Rule G-11 on Primary Offering Practices
Concerning Rule G-32 on Disclosures in Connection with Primary Offering Practices
Bond Dealers of America
November 17, 2017
SIFMA provided comments to the Municipal Securities Rulemaking Board (MSRB) on a recently released concept proposal to solicit input from market participants on MSRB rules on primary offering practices. The concept proposal seeks input on evolving primary offering practices and whether the current rules continue to operate effectively or whether changes to MSRB Rule G-11, on primary offering practices, and Rule G-32, on disclosures in connection with primary offerings, may be warranted.
See also: Regulatory Notice
Risk Alert details ‘frequently observed deficiencies’ in the areas of registration, books and records, and supervision
The Securities and Exchange Commission’s exam division has released a report showing widespread compliance failures among municipal advisors.
In a Nov. 7 risk alert on observations from municipal exams, the agency’s Office of Compliance Inspections and Examinations said it had conducted more than 110 exams of municipal advisors and evaluated their compliance with registration, statutory fiduciary standard of care, fair dealing, recordkeeping and supervision.
Examiners most frequently observed “deficiencies in the areas of registration, books and records, and supervision,” the alert states, with some firms being referred to the enforcement division.
The report’s key takeaway: “Municipal advisors should take steps to educate themselves regarding their compliance obligations,” the SEC warned.
Lynnette Kelly, director of the Municipal Securities Rulemaking Board, which is overseen by the SEC, told ThinkAdvisor in an email message that MSRB “encourages the municipal advisory community to carefully consider the SEC’s examination feedback.”
“A robust compliance and enforcement regime is critical to ensuring the integrity of the municipal securities market,” she said, adding that the MSRB has established “a strategic goal to provide compliance assistance to regulated entities.”
Municipal advisors and municipal securities dealers, she continued, “will be seeing a significant increase in MSRB outreach events, educational opportunities and the release of various forms of compliance aids, all with the goal of facilitating compliance with MSRB rules.”
Municipal advisors became subject to SEC registration and jurisdiction pursuant to the Dodd-Frank Act of 2010.
The risk alert “is the warning shot across the bow for municipal advisors,” according to Cipperman Compliance Services. OCIE publishes examination findings and recommendations “as a foreshadowing of impending enforcement actions.”
ThinkAdvisor
by Melanie Waddell
Washington, DC – The Municipal Securities Rulemaking Board (MSRB) is seeking public comment on its approach to enhancing compliance support, a long-term strategic priority for the organization. The MSRB’s request for comment invites regulated entities, other market stakeholders and the public to share their perspectives on how the MSRB can most effectively support understanding of its rules.
“The MSRB deeply values the varied perspectives of regulated entities and other stakeholders who work together to preserve the integrity of the municipal securities market,” said MSRB Executive Director Lynnette Kelly. “Public input on our compliance support initiative is another way to help us prioritize and focus our efforts on the areas where additional compliance support would be most effective for the overall fairness and efficiency of the market.”
The MSRB recently established a Compliance Advisory Group to provide additional input to the Board of Directors on its compliance priorities, centralized its growing library of compliance resources into an online Compliance Center and published information on the types of compliance assistance provided by the MSRB.
Today’s request for comment seeks to further leverage the experience and perspectives of regulated entities and other stakeholders as the MSRB prioritizes, develops and delivers additional compliance support in the coming months. Comments should be submitted to the MSRB by December 22, 2017.
“Our commitment to obtaining stakeholder input will continue throughout the year as we communicate about existing regulatory requirements, host and participate in industry events, and provide compliance tools and educational webinars,” Kelly said.
Date: November 16, 2017
Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org
Washington, DC – In support of its long-term strategic goals, the Municipal Securities Rulemaking Board (MSRB) plans to provide additional resources and tools for municipal securities dealers and municipal advisors to facilitate compliance with MSRB rules. In addition, the MSRB will continue to provide reports and commentary that promote dialogue about market practices, products or trends that can have an impact on the integrity of the municipal securities market. The MSRB today released two publications to clarify its approach to compliance and market leadership activities.
“As a self-regulatory organization, it is important that we effectively communicate the MSRB’s intent with respect to regulatory and market issues,” said MSRB Executive Director Lynnette Kelly. “Our compliance activities are focused squarely on MSRB regulations and will be informed by stakeholder engagement. We have formed an external advisory group and will be continuing to seek input from municipal securities dealers and municipal advisors to ensure that our resources and tools reflect that input.”
The MSRB’s compliance support activities will include issuing interpretive guidance to clarify the application of an MSRB rule or creating a sample template, fact sheet or other compliance resource to serve as a reference for regulated entities. The MSRB also publishes annual compliance advisories to highlight considerations for municipal securities dealers and municipal advisors when assessing the effectiveness of their supervisory systems and compliance processes. Read more about the types of compliance information.
Consistent with the MSRB’s obligation to protect investors, issuers and the public interest, the MSRB publishes— when the Board of Directors believes appropriate—market advisories, reports or other commentary to bring attention to issues in the municipal securities market that may have an impact on market integrity and fairness. The MSRB also contributes data and expertise to inform policy discussions on topics related to the municipal securities market. Read more about the MSRB’s market leadership activities.
“It is the MSRB’s responsibility to flag troubling market practices we believe are potentially harmful to investors or municipal entities, even if they fall outside of our rulemaking authority,” Kelly said. “Our market leadership activities do not propose rulemaking but rather raise awareness of issues that could be detrimental to the integrity of the market and further encourage dialogue among market participants. We have been doing this for some time, one example being our advocacy for increased disclosure by municipal securities issuers of bank loans.”
The MSRB will clearly label and identify new compliance and market leadership publications to communicate the intent of these publications and help the market participants make best use of the information.
Date: November 9, 2017
Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org
On November 8, the MSRB announced plans to revise the Municipal Securities Representative Examination, or Series 52, into a “specialized knowledge exam.” This change comes ahead of the Financial Industry Regulatory Authority’s (FINRA) Securities Industry Essentials (SIE) exam, which will be released on October 1, 2018. The changes are intended to “streamline duplicative testing” and “reduce testing redundancies.”
Norwalk, CT, November 9, 2017—The Governmental Accounting Standards Board (GASB) today proposed guidance that would clarify the accounting and financial reporting for a state or local government’s majority equity interest in an organization that remains legally separate after acquisition.
A public hospital acquiring a rehabilitation center that remains legally separate from the hospital after acquisition is an example of the kind of situation the proposed guidance addresses.
Under guidance proposed in the Exposure Draft, Accounting and Financial Reporting for Majority Equity Interests, a government’s majority equity interest in a legally separate organization would be reported as an investment if that equity interest meets the GASB’s definition of an investment. Except in certain specific circumstances, a majority equity interest that meets the definition of an investment would be measured using the equity method.
For all other majority equity interests in a legally separate entity—those that do not meet the definition of an investment—a government would report the legally separate entity as a component unit.
The document also proposes guidance for remeasuring assets and liabilities of an acquired entity that remains legally separate to be consistent with existing standards that apply to acquisitions that do not remain legally separate.
The Exposure Draft is available on the GASB website, www.gasb.org. Stakeholders are encouraged to review the proposal and provide comments by January 12, 2018.
The National Federation of Municipal Analysts responded to the MSRB’s Regulatory Notice 2017-19, Request for Comment on a Concept Proposal Regarding Amendments to Primary Offering Practices of Brokers, Dealers and Municipal Securities Dealers, on November 9, 2017.
To read the NFMA comment, click here.
Municipal market participants may not be ready in time to implement a pending markup disclosure rule on which regulators place huge importance.
Amendments to Municipal Securities Rulemaking Board Rules G-15 on confirmation and G-30 on prices and commissions, which are to take effect on May 14, 2018, will require dealers to disclose their markups and markdowns on certain transactions in the confirmations they send retail customers — a sea change for the municipal market. MSRB executive director Lynnette Kelly has called the rule changes “a game changer.” Both the MSRB and Financial Industry Regulatory Authority have put significant effort into providing firms with education about the rule changes.
But as the clock ticks down toward the compliance date, many in the industry worry they will not be able to put in place changes that will allow their automated systems to comply with the new requirements.
Under the rule changes, markup disclosures will have to be given as a total dollar amount and a percentage of the prevailing market price.
The amendments establish a “waterfall” of factors for determining the PMP. Dealers initially are to 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 can 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, firms can look at contemporaneous trades of similar securities. The MSRB included a list of “non-exclusive factors” like credit quality, size of the issue, and comparable yield that can be used to determine if securities are similar. The bottom of the waterfall allows dealers to use prices or yields derived from economic models.
While complicated, most dealers think that they can comply with the rule changes, whether internally or through a third-party vendor. But what many are far less sure about is whether they will be prepared, by May 14, to automate the process from transaction to delivering the customer a confirmation with a properly-disclosed markup or markdown. A number of dealer representatives made that point while speaking at an MSRB roundtable earlier this month.
“The clock is ticking on this year, and we don’t have a solution in hand to automate the waterfall,” Daren Colaiacovo, a director of retail trading at RBC Capital Markets said at the roundtable. “It’s something we’re taking very seriously.”
Colaiacovo said that while several vendors are offering PMP calculation solutions for markup rule compliance, he is not aware that any firm has their solution in hand and is set to go.
Kristin Maher, head of fixed income services at Wells Fargo, said Wells has tested solutions with several vendors but is still working out how to automate their trades for compliance.
“How are we going to do this with a reasonable amount of resources dedicated to this?” she asked.
Dealer groups are reflecting the concerns of individual firms. They are pressing the MSRB and the Securities and Exchange Commission to extend the compliance date, possibly by several months.
“I think the industry is still getting ready,” said Bond Dealers of America chief executive officer Mike Nicholas. “I think there’s still a long way to go in terms of getting ready for this.”
BDA has stressed the complexities of automating the waterfall process in past comments to the MSRB and SEC. Nicholas is concerned that the information firms end up providing on confirmations could wind up confusing customers.
“The last thing BDA members want is to create misleading information for retail investors,” Nicholas said.
Securities Industry and Financial Markets Association managing director and co-head of municipal securities Michael Decker said SIFMA is having discussions about these concerns with individual firms and with the regulators.
“The markup and PMP rules are complex,” Decker said. “In order to automate compliance, which is absolutely necessary for many firms, dealers will need to use sophisticated systems. Some firms are concerned that they will not have enough time to fully integrate and test their compliance systems by the deadline, especially if they’re going to depend on third-party vendors whose timelines are out of dealers’ control. SIFMA wants to ensure that the customer experience with the new confirm disclosure is a smooth as possible and we are actively discussing the obstacles to full readiness with our members and regulators.”
Vendors say they are confident in their products, but that the real challenge is in integrating their systems with the systems of individual dealer firms to ensure a smooth automated process from start to finish.
Tony Miscimarra, a managing director at BondWave, said he is “guardedly” certain his firm’s product is set to go because it has done thousands of trial runs with data provided by clients and potential clients. But only a tiny slice of the industry is even in the integration process yet, he said.
“Even those that are on the curve or even ahead of the curve now have to face implementation challenges,” Miscimarra said.
TMC Bonds CEO Thomas Vales said that because TMC runs an alternative trading platform, the infrastructure for providing a PMP solution is basically already in place, but Vales also expressed that integration is a heavy lift.
“Everyone is focused on what they need to do at hand, and then the last piece is going to be trying to integrate it with everyone else,” Vales said.
Miscimarra said an extension granted by regulators wouldn’t surprise him, but warned that firms can’t simply punt the problem down the road if they get one.
“That would be a big mistake,” he said.
The Bond Buyer
By Kyle Glazier
November 07 2017, 3:08pm EST
PHOENIX – The Municipal Securities Rulemaking Board has filed with the Securities and Exchange Commission an amendment to its proposal to require dealers and muni advisors to obtain CUSIP numbers in private placement deals, tweaking an exemption to reflect typical muni bond structures.
The change to the proposal, which was filed Wednesday after being telegraphed as coming in the briefing on the board’s quarterly meeting late last month, is directly responsive to the concerns of some market participants.
The broader proposal amends the MSRB’s Rule G-34 on CUSIP numbers to make clear that dealers must acquire CUSIPS when orchestrating private placements. CUSIP numbers are six and nine sets of numbers and letters that identify an issuer and each maturity of a municipal issuance. The MSRB said when it proposed the Rule G-34 change that it has always considered it a requirement for dealers to acquire CUSIPS when acting as placement agents. The rule change would clarify that, but dealers have contended that such a requirement would be new.
The proposal also would require that non-dealer municipal advisors be subject to the CUSIP requirement for new issue securities that are sold in a competitive offering.
Among the issues raised by comment letters to the MSRB and SEC was an exception to the requirement that said CUSIP numbers are not needed for direct purchases by banks, their non-dealer control affiliates and consortiums, where the dealer or municipal advisor reasonably believes the purchaser’s intent is to hold the securities to maturity. Issuers and dealers alike had raised concerns that investors would be hesitant to certify that they planned to hold “to maturity,” since muni bonds often have much earlier call dates.
Under the revision filed with the SEC, titled Amendment No. 1, that exception now reads that a dealer or MA “may elect not to apply for assignment of a CUSIP number or numbers if the underwriter or municipal advisor reasonably believes (e.g., by obtaining a written representation) that the present intent of the purchasing entity or entities is to hold the municipal securities to maturity or earlier redemption or mandatory tender.”
The MSRB’s filing also creates an exception for direct purchases by municipal entities that are not established for the purpose of secondary market trading, such as state revolving funds and bond banks. The Securities Industry and Financial Markets Association responded favorably to the MSRB’s changes, though still believes the MSRB should have eliminated references to a time frame for the intergovernmental exemption.
“SIFMA is pleased the MSRB has submitted Amendment No. 1 to its proposed rule change to MSRB Rule G-34,” said Leslie Norwood, a managing director, associate general counsel, and co-head of municipal securities at the dealer group. “The expansion of the exception, which now includes certain intergovernmental purchases of securities, clarifies that these securities that are never intended to be traded in the secondary market do not need to incur the expense of obtaining a CUSIP number. We also appreciate the clarifying language with respect to the intent of the purchasing entity, although we believe the MSRB should have also eliminated the time frame with respect to the purchaser’s intent.”
The MSRB also announced today that it is revising its Series 52 exam for municipal securities representatives into a specialized knowledge exam in advance of the Oct. 1, 2018 release of the Financial Industry Regulatory Authority’s Securities Industry Essentials examination.
“The MSRB worked collaboratively with FINRA during development of the SIE examination to streamline duplicative testing of general knowledge that has traditionally been covered across several representative-level examinations,” the MSRB said in a notice. “The MSRB supports the goal to reduce testing redundancies for securities industry professionals and expand opportunities for prospective securities professionals. To that end, the MSRB anticipates filing a proposed rule change with the SEC in early 2018 to require the SIE as a prerequisite to registration as a Municipal Securities Representative, Municipal Securities Sales Limited Representative and Limited Representative-Investment Company and Variable Contracts Product Representative.”
By Kyle Glazier
SOURCEMEDIA | MUNICIPAL | 11/08/17 07:22 PM EST
The Municipal Securities Rulemaking Board (MSRB) filed with the Securities and Exchange Commission (SEC) on November 8 an amendment to its proposed changes to MSRB Rule G-34, on obtaining CUSIP numbers. The amendment modifies the principles-based exception for certain sales of municipal securities.
“SIFMA is pleased the MSRB has submitted Amendment No. 1 to its proposed rule change to MSRB Rule G-34. The expansion of the exception, which now includes certain intergovernmental purchases of securities– clarifies that these securities that are never intended to be traded in the secondary market do not need to incur the expense of obtaining a CUSIP number,” said Leslie Norwood, a managing director and co-head of SIFMA’s municipal division. “We also appreciate the clarifying language with respect to the intent of the purchasing entity, although we believe the MSRB should have also eliminated the time frame with respect to the purchaser’s intent.”
The Municipal Securities Rulemaking Board (MSRB) is providing a new compliance resource for municipal advisors about continuing education program requirements established by MSRB Rule G-3, on professional qualifications.
These answers to frequently asked questions (FAQs) address questions raised by participants during the MSRB’s October 12, 2017 webinar, which is available on-demand here.
The FAQs and additional compliance resources for all regulated entities are available in the MSRB’s online Compliance Center.
Washington, DC – New data from the Municipal Securities Rulemaking Board (MSRB) reflect steady and robust use of alternative trading systems (ATSs) by municipal security dealers. The MSRB, which collects municipal securities pricing and other data, released statistics today showing that over the last year, an average of approximately 59 percent of trades between dealers—and 29 percent of par volume traded—were executed on an ATS.
About 90 percent of ATS trades were conducted on transactions of $100,000 or less, an amount that is typically a proxy for retail-sized transaction. When looking at all retail-sized trades in the municipal market, about 25 percent were conducted on ATSs. The data are based on mandatory information reported to the MSRB by municipal securities dealers and are the first official statistics on electronic trading of municipal bonds. Read the MSRB’s Fact Sheet on Inter-Dealer Municipal Trading.
“Our data provide the market’s first view of the extent to which ATSs are used in the muni market,” said John Bagley, Chief Market Structure Officer at the MSRB. “These platforms, which disseminate quotes and expand access to bond inventories, can help improve liquidity and market efficiency. They can also help dealers obtain the best pricing for investors.”
Municipal securities are traded in an over-the-counter dealer market and not on a central exchange. Dealers, acting as intermediaries for investors, trade in one of three ways: on ATSs, through broker’s brokers and directly with each other. Data reported to the MSRB show that approximately:
Cumulatively, municipal inter-dealer trades accounted for 39 percent of all trades and 20 percent of all par traded in the market over the prior 12 months. The remaining are purchases and sales between dealers and customers.
Unlike electronic brokerage platforms available to individual investors, an ATS can be used only by dealers and institutional investors. ATSs provide electronic access to available municipal securities, price transparency and support liquidity.
“Federal Reserve data show that dealer inventories of municipal securities declined about 50 percent over the last decade,” Bagley said. “ATSs and broker’s brokers can provide a way for dealers to access bids and offers from a wide range of market participants.”
The MSRB began collecting information to identify which municipal bond transactions occur on an ATS in July 2016 to determine the extent to which they are used in the market. Historically, dealers have identified in their reported trades when they use a broker’s broker. Today, ATS trades, along with broker’s brokers trades, are flagged publicly on the MSRB’s Electronic Municipal Market Access (EMMA®) website, enhancing transparency about the use of digital municipal bond trading. The MSRB will continue to publish data on inter-dealer trading and ATS trades in the municipal market on an annual basis.
The MSRB regularly publishes municipal market statistics, including market-wide trading activity on a quarterly basis, and an annual Fact Book available here. The MSRB’s market statistics on the EMMA website cover trading activity of municipal securities, new municipal issuance and continuing disclosure submissions.
Date: November 9, 2017
Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org
Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today announced the members of its Compliance Advisory Group, which will provide expertise and input to the MSRB Board of Directors to help inform the organization’s long-term strategic goal to facilitate industry understanding of and compliance with MSRB rules.
“With the foundational rules for municipal advisors now in place and a landmark new investor protection rule taking effect next year, the MSRB is increasing our commitment to assisting regulated entities with understanding their rules of conduct and developing effective compliance procedures,” said Board Chair Lucy Hooper.
“We are bringing together a well-respected group of compliance-oriented senior executives from diverse regulated firms whose insights will help us prioritize the areas where the industry may benefit from further guidance or tools that support compliance.”
Members of the Compliance Advisory Group are:
The Compliance Advisory Group will meet periodically throughout Fiscal Year 2018 to discuss potential regulatory topics that may warrant additional compliance assistance, such as enhanced outreach and engagement, new guidance and resources, and improved digital communications for regulated entities.
Date: October 31, 2017
Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org
Washington, DC – As part of a long-term strategic focus to further evolve the Electronic Municipal Market Access (EMMA®) website, the Municipal Securities Rulemaking Board (MSRB) today published a renewed vision for EMMA that reflects its broad market utility and the ongoing information needs of all market stakeholders.
The MSRB established the EMMA website nearly a decade ago to provide retail investors with centralized, online and free access to real-time municipal securities transaction prices and disclosure documents.
“Given the broader market’s strong adoption of EMMA as an industry utility, we believe a vision statement that captures the interests of not only retail investors but also municipal entities, dealers, municipal advisors, institutional investors and the public is important for future development,” said MSRB Executive Director Lynnette Kelly.
The MSRB also has developed a set of guiding principles for EMMA to inform priorities for future enhancements.
EMMA Vision Statement
Promoting transparency in the municipal securities market is part of the mission of the Municipal Securities Rulemaking Board (MSRB). Our Electronic Municipal Market Access (EMMA®) website is designed to support a transparent market and serve the evolving information and decision-making needs of market participants and the public. EMMA provides free data, disclosures and interactive tools that promote a fair and efficient municipal securities market. Enhancing the availability of pricing-related market data by creating a Central Transparency Platform (CTP) on EMMA and helping market participants comply with regulatory obligations are future-state goals.
EMMA Guiding Principles
“By establishing these guiding principles, we can ensure our investment in EMMA advances market transparency and appropriately balances costs, benefits and the public interest,” Kelly said.
In Fiscal Year 2018, the MSRB plans to make noticeable improvements that were informed by a year-long series of focus groups and input from a diverse range of market participants, including:
Date: November 1, 2017
Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org
NEW YORK (Reuters) – The U.S. Securities and Exchange Commission has taken the first step in formally establishing an advisory committee to scrutinize the rules of the fixed income market and advise on potential reforms, according to a regulatory filing.
The Fixed Income Market Structure Advisory Committee (FIMSAC) will have a two-year mandate and will likely meet four times a year, with subcommittees potentially meeting more often, the regulator said in the filing, dated Thursday, Oct. 26.
In July, SEC Chairman Jay Clayton brought up the idea of a committee to advise the regulator on the bond market. It was his first major address after joining the agency.
Issues the committee may look at include pre-trade transparency, the complexities of the municipal bond market, and bond market liquidity, SEC Commissioner Michael Piwowar said on Thursday in prepared remarks at a market structure conference.
“There are enough issues within that topic alone to keep the committee members busy for some time,” he said of the liquidity issue. “Including the impact of bond ETFs on liquidity in the underlying securities, the evolving role of the buy-side in the provision of liquidity, and the impact of regulatory and monetary policy decisions on fixed income markets,” he said.
The new committee will have up to 21 voting members that will be appointed by the SEC and will represent a cross-section of the fixed income industry, the filing said. Non-voting members may also be named.
The committee can be established 15 days after the SEC filing is published in the federal registry.
The SEC has had a similar committee in place to advise it on the equity markets since February 2015> That panel, composed of industry experts and academics, has made recommendations to the regulator on a wide range of issues, including regulation of trading venues, market volatility, and broker-dealer order handling practices.
by John McCrank
October 27, 2017
Washington, DC – The Board of Directors of the Municipal Securities Rulemaking Board (MSRB) held its quarterly meeting October 25-26, 2017, where it discussed regulatory and market transparency initiatives aimed at protecting investors and promoting a fair and efficient municipal securities market.
The Board also met with leadership of the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA), hosting SEC Chairman Jay Clayton and Office of Municipal Securities’ Acting Director Rebecca Olsen, and separately, FINRA’s President and CEO Robert Cook and Senior Director of Fixed Income Regulation Cynthia Friedlander. The regulators discussed oversight of the municipal securities market and coordination on cross-market initiatives.
The Board discussed several topics related to its strategic initiatives to support regulatory compliance and further evolve the MSRB’s Electronic Municipal Market Access (EMMA®) website into an essential municipal market utility.
To enhance its engagement with external parties, the Board is taking two key steps. First, to ensure that the MSRB’s compliance support activities leverage the experience and perspectives of regulated entities and other stakeholders, the Board approved publishing a request for comment to solicit public input on how the MSRB can best assist municipal securities dealers and municipal advisors in understanding, implementing and complying with current MSRB rules. In addition, the MSRB is establishing a compliance advisory group that will provide expertise and input to the Board to help inform the organization’s long-term strategic goal to facilitate industry understanding of and compliance with MSRB rules.
“We are committed to incorporating external input from regulated entities and other market participants at every stage of our compliance support activities to ensure they are informed by the diverse perspectives and needs of all stakeholders,” said MSRB Executive Director Lynnette Kelly.
The Board also discussed the MSRB’s ongoing work to further evolve the EMMA website into an industry-leading platform that meets the needs of market participants and established guiding principles for future functionality and improving the overall user experience of the website.
The MSRB has been engaged in a year-long series of focus groups that included retail investors, issuers, broker-dealers, municipal advisors, dissemination agents and others to inform its approach. “Nearly 10 years after creating EMMA, we are rethinking and reexamining its future,” said Kelly. “Our principles will guide decisions about that path.”
At its meeting, the Board discussed several ongoing rulemaking initiatives and, as a result of industry input and MSRB outreach to commenters and other market stakeholders, decided to suspend one proposal, and amend two others.
Minimum Denominations
The Board agreed to suspend rulemaking efforts on its earlier initiative to amend the MSRB rule on minimum denominations of municipal securities transactions and to instead prepare a report addressing the policy issues faced by diverse market participants. The rule generally prohibits dealers from effecting customer transactions below the minimum denominations set by the bond issuer. The MSRB sought comment twice in 2016 on whether additional exceptions would be consistent with the rule’s investor protection intent and enhance liquidity for investors that hold positions below the minimum denomination. The MSRB filed a proposed rule change with the SEC in January 2017 but withdrew it in May in light of ongoing concerns expressed in public comments. To continue to evaluate the issue, the Board directed MSRB staff to meet with a diverse group of market participants, with a particular effort to include the views of issuers of municipal securities.
“Our intensive outreach and subsequent analysis helped the Board determine that, given the conflicting views around core issues, the best option for the market is to maintain the existing rule, publish our outreach findings and promote education for all deal team members about the role and effects of minimum denominations in bond documents,” said MSRB Executive Director Lynnette Kelly. “The MSRB is grateful to the many groups and individuals who responded to our outreach efforts and shared their thoughtful input on the minimum denominations issue.”
Obtaining CUSIP Numbers
In response to comment letters received by the SEC on proposed amendments to MSRB Rule G-34, on obtaining CUSIP numbers, the Board agreed to amend its proposal currently pending before the SEC. The amendment will modify the proposed principles-based exception for sales of municipal securities directly purchased and intended to be held by banks to more accurately reflect that the bonds may be subject to a mandatory tender or other redemption prior to maturity.
Similarly, the Board agreed to extend the principles-based exception to apply to purchases of new issue municipal securities by municipal entities that are not established for the purpose of secondary market trading, such as state revolving funds and bond banks. “The CUSIP proposal has also benefited from multiple rounds of industry and public comments,” Kelly said. “The result is an appropriately tailored rule proposal that is workable and promotes a fair and efficient municipal securities market.”
529 College Savings Plans/ABLE Programs Additional Data Elements
The third rulemaking initiative that the Board addressed at its meeting was a proposal to revise MSRB Form G-45 under MSRB Rule G-45, on reporting of information on municipal fund securities, including the collection of additional data about investment options offered in ABLE (Achieving a Better Life Experience Act) programs and 529 college savings plans. Rule G-45 supports the MSRB’s collection of reliable and consistent data about these types of “municipal fund securities” in support of its regulatory oversight. The Board discussed input received on what commenters considered to be the relatively more burdensome aspects of the proposed amendments and, in response, will modify the proposal before filing it for approval with the SEC.
Date: October 30, 2017
Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org
The National State Auditors Association recently responded to the AICPA’s Professional Ethics Executive Committee’s exposure draft, State and Local Government Entities (formerly Entities Included in State and Local Government Financial Statements). NSAA members generally agree with the proposed interpretation and other guidance.
The response was developed by NSAA’s Audit Standards and Reporting Committee, chaired by Randy Roberts, senior technical director with Arizona’s Office of the Auditor General.
View the complete response letter.
Tuesday, October 24, 2017
SO, HOW ARE WE DOING?
Regular followers of the FASB, GASB, or FAF know that stakeholder outreach is woven into our DNA. Our primary mission is to serve investors and other users of financial reports, and we best fulfill that mission through extensive conversations with a diverse group of stakeholders who:
The standard-setting Boards have these interactions to help identify whether the benefit of a new approach in an accounting standard justifies the costs stakeholders will incur to provide it. Naturally, these are rich—and critical—conversations, but periodically it helps to have a different kind of dialogue: do our stakeholders think we are doing our jobs well, and how can we improve?
STAKEHOLDER SURVEY
Earlier this year we had that dialogue. It took the form of a survey that we sent out to thousands of stakeholders. More than 1,600 responded, providing a rich trove of data representing the views of a strong cross-section of our stakeholder groups. To those of you reading this column who participated in the survey, thank you!
This was no idle exercise. The survey results were a major topic of conversation for both standard-setting Boards as well as the FAF Board of Trustees. We also briefed the results to the FASB and GASB technical staffs, as well as the members of our key advisory groups: the Financial Accounting Standards Advisory Council (FASAC) and Governmental Accounting Standards Advisory Council (GASAC).
Some of the feedback was encouraging. When asked the simple question, “what is your overall opinion of the FASB/GASB?” both Boards earned high scores. Notably, these results were higher than the scores earned on comparable surveys conducted in 2006. This positive trend suggests better alignment between the work that the Boards are doing and what stakeholders are seeking.
Drilling down, we wanted to learn whether stakeholders think the Boards consistently model the values we consider vital to success: Integrity, Independence, Objectivity, Transparency, Leadership, and Inclusiveness. While both Boards earned similarly good scores for all six, it was notable that Integrity stood out as materially stronger than all the other values. The Boards work hard to maintain this reputation among stakeholders, and it is gratifying to see that reflected in the survey feedback.
WHAT’S MOST IMPORTANT?
The survey put stakeholders through a rigorous series of questions designed to tease out what they value most from the FASB and GASB. From this exercise, three key needs emerged. Stakeholders want the Boards to:
Addressing these needs was already an important priority for the FASB and GASB, even before the stakeholder survey. Both Boards were encouraged to see that the very highest scores in the survey (across all categories of questions) came from investors and other users of financial statements. This is an important data point that suggests the Boards are fulfilling their mission for investors and other financial statement users to find standards and financial reporting useful.
Both Boards also want to deliver standards that improve accounting and financial reporting. The recent FASB agenda consultation is an example of the FASB co-collaborating with stakeholders to identify the areas of financial reporting most ripe for improvement. Likewise, GASB’s ambitious early-stage work on the Financial Reporting Model addresses a unique opportunity to enhance public sector financial reporting.
Taking opportunities to make standards more simple, clear, and unambiguous is a high priority for the FASB and GASB. The FASB’s recently issued standard for hedge accounting is one example of an effort to simplify standards, as is a proposed change to accounting for share-based payments to nonemployees, and several smaller projects. GASB’s Financial Reporting Model project also hopes to identify targeted opportunities to simplify reporting for state and local governments.
OTHER INSIGHTS
Survey respondents also expressed interest in having the Boards increase their efforts to educate stakeholders about how to implement new standards. While a major education initiative is not on the horizon (there are many existing sources of education and training already available to the profession), the Boards have stepped up outreach efforts through Transition Resource Groups, webinars, Implementation Guides, and plain-English resources. Board members and senior staff also hit the road to speak directly to stakeholders at meetings and conferences, and reached a combined audience of 80,000 FASB and GASB stakeholders in 2016 alone.
Lastly, the survey touched on the Financial Accounting Foundation. While the FAF is less well-known to stakeholders, those who are familiar with its roles and functions give high scores for overseeing and protecting the integrity and independence of the standard-setting process.
AN INSPIRATION AND A CHALLENGE
Conducting this survey and digesting its results have been eye-opening experiences for our organization. As closely as our Boards interact with stakeholders across the country, we don’t often reframe our conversation to larger questions of Board attributes and performance. The results of this survey are both an inspiration and a challenge: how can we build upon our strengths as an organization, and at the same time engage with stakeholders to improve in the ways they deem most important?
We are grateful to our stakeholders for inspiring our work and for challenging us to do even better.
I welcome your comments on this or any other topic. Please write to me at presidentsdesk@f-a-f.org.
BY TERRI POLLEY, FAF PRESIDENT AND CHIEF EXECUTIVE OFFICER
FALL 2017
FINANCIAL ACCOUNTING FOUNDATION
Summary
When respondents are no longer in business, recovery of arbitration awards against them often is unavailing. Accordingly, FINRA is proposing to amend the Code of Arbitration Procedure for Customer Disputes (Code) to expand a customer’s options to withdraw an arbitration claim if a firm or an associated person becomes inactive before a claim is filed or during a pending arbitration. In addition, the proposed amendments would allow customers to amend pleadings, postpone hearings and receive a refund of filing fees under these situations.
The text of the proposed amendments can be found here.
Questions concerning this Notice should be directed to:
Comment Period Expires: December 18, 2017
MSRB issues letter to SEC Investor Advocate highlights muni market practices that may affect retail investors.
MSRB announces topics to be discussed at Board meeting on October 25-26, 2017.
Read about the MSRB’s mission-driven goals and projected revenues and spending in the FY18 budget summary.
Municipal advisors and municipal securities dealers can now get easier access to rule summaries, compliance advisories and other educational material about municipal market regulations in a new online Compliance Center on MSRB.org. The Municipal Securities Rulemaking Board (MSRB) today launched a series of website enhancements to elevate the prominence and accessibility of compliance information.
The website enhancements support the MSRB’s long-term strategic goal to facilitate industry understanding of and compliance with MSRB rules. The MSRB will continue to add new resources to the Compliance Center to support regulated entities’ ability to comply with new and existing standards of conduct.
The Governmental Accounting Standards Board (GASB) is conducting a survey of users of state and local government financial information regarding certain note disclosure requirements. The survey is part of a GASB research effort to evaluate the effectiveness of those note disclosures. The survey, including background, objective and instructions, can be accessed here. The deadline for completing the survey is Friday, November 17, 2017.
As someone who needs financial information about state and local governments, your views are vital to the GASB’s efforts to improve financial accounting and reporting. If you have any questions about this survey, please contact Pam Dolan at 203-956-3473 or pdolan@gasb.org.
WASHINGTON — The Treasury Department’s priority plan for the 12 months after July 1, 2017 contains rules or guidance on private activity bonds, remedial actions, and bond reissuance.
The 2017-2018 Priority Guidance Plan, published on Friday, covers the period through June 30, 2018 and contains several muni bond regulatory projects that were on the previous 2016-1917 plan, including the public notice and approval rules for private activity bonds under TEFRA (the Tax Equity and Fiscal Responsibility Act of 1982).
The TEFRA rules were proposed on Sept. 28. Muni issuers were allowed to opt to immediately use them between the day they were proposed and their effective date, which still must be determined. Otherwise the rules will be prospectively effective when finalized. Treasury and the IRS have asked for comments on the proposed rules and requests for a public hearing to be submitted to them by Dec. 27 of this year.
The plan also includes another item on the previous 2016-2017 plan — actions that issuers can take to remediate certain tax law or rule violations for tax-advantaged bonds, which include tax-exempt, taxable direct-pay, and taxable tax-credit bonds.
Bond reissuance rules remain on the list from the previous plan. Treasury and the IRS have released several guidance documents on reissuance, which is when the terms of bond issues have been materially changed such that they are considered to be new bonds subject to the latest tax laws and rule. The agencies have been working on a project to modernize and possibly consolidate this guidance.
The plan appears to contain one new item not listed in last year’s plan — guidance on private activity bonds. But it does not elaborate on the kind of guidance envisioned.
Also listed on the 2017-2018 pan is guidance on the overpayment of arbitrage that had been rebated. That guidance was in Revenue Procedure 2017-50, which was published on Aug. 25, 2017 and took effect at that time. It extended the deadline for issuers that file claims for recovery of excess arbitrage they inadvertently rebated to the federal guidance.
By Lynn Hume
SOURCEMEDIA | MUNICIPAL | 10/23/17 07:02 PM EDT
On October 10, SIFMA submitted comments to the Securities and Exchange Commission (SEC) in response to the Municipal Securities Rulemaking Board’s (MSRB) proposed rule filing SR-MSRB-2017-06, which would amend MSRB Rule G-34, on CUSIP numbers, new issue and market information.
SIFMA urged the SEC to institute disapproval proceedings regarding the Proposal in its current form, because the amendment, as filed, is unduly restrictive for market participants and lacks clarity in material respects. If approved, the rule would codify the MSRB’s interpretation that municipal securities dealers are required to obtain CUSIP numbers for new issue securities sold in private placement transactions, including direct purchases. Additionally, if approved, non-dealer municipal advisors advising on competitive offerings would be required, like dealer municipal advisors under the current rule, to apply for CUSIP numbers.
“SIFMA questions the expressed rationale for the MSRB’s proposed rulemaking, as the sole purpose for the original proposal to adopt Rule G-34 was merely to facilitate clearance and settlement of municipal securities; not to define the term ‘underwriter’,” said SIFMA managing director and associate general counsel Leslie Norwood.
PHOENIX – Municipal market participants are asking the Securities and Exchange Commission to reject at least parts of a Municipal Securities Rulemaking Board proposal to codify that dealers are required to obtain CUSIP numbers for new issue securities sold in private placement transactions.
Trade groups representing dealers, municipal advisors, issuers, banks, and individual firms weighed in on the proposal in comment letters to the SEC this week.
CUSIP numbers are used to identify securities, and one is assigned to each maturity of a municipal issuance. The MSRB said when it proposed the change to its Rule G-34 that it has always considered it a requirement for dealers to acquire CUSIPS when acting as placement agents, and is trying to clarify that.
Dealers have contended that such a requirement is new.
The MSRB is also proposing to require that non-dealer municipal advisors be subject to the CUSIP requirement for new issue securities that are sold in a competitive offering. Although the MSRB made some tweaks to the proposal during its own comment process, commenters still told the SEC that they see serious problems with it.
The Securities Industry and Financial Markets Association asked the SEC not to approve the proposal, which SIFMA believes would expand G-34 beyond its intent, since dealers acting as placement agents do not “acquire” securities as underwriters do. Dealers have always interpreted G-34 as not requiring CUSIPs if a dealer does not acquire a new issue in a transaction that is not a distribution.
“SIFMA questions the expressed rationale for the MSRB’s proposed rulemaking, as the sole purpose for the original proposal to adopt Rule G-34 was merely to facilitate clearance and settlement of municipal securities; not to define the term ‘underwriter,’” wrote SIFMA managing director and associate general counsel Leslie Norwood.
Norwood also told the Bond Buyer that SIFMA would like the SEC to confirm that there would be no retroactive enforcement of this rule change for transactions that already occurred.
Some commenters told the SEC that they see problems with the proposal’s exception to the CUSIP requirement. Under the exception, CUSIP numbers are not needed for direct purchases by banks, their non-dealer control affiliates and consortiums, where the dealer or municipal advisor reasonably believes the purchaser’s intent is to hold the securities to maturity. SIFMA, the National Association of Municipal Advisors, Government Finance Officers Association, and American Bankers Association all characterized that language as impractical. Munis may have 20- or 30-year maturities commenters pointed out, and usually feature a much earlier call provision.
“We are concerned that the investor will not express present intent to hold the securities ‘until maturity’ as required by the proposal, and therefore will be deterred from purchasing the security,” wrote Emily Brock, director of the GFOA’s Federal Liaison Center.
“The terms ‘reasonably believe’ and ‘is likely’ are very open to different interpretations and should be further clarified within the rule to allow for MAs and underwriters to use the same standard in all transactions,” wrote Susan Gaffney, executive director of NAMA.
Cristeena Naser, vice president and senior counsel at the American Bankers Association’s Center for Securities, Trust & Investment, told the SEC it should consider an alternate wording to the exception language that the ABA had discussed with the MSRB.
“The language ABA proffered for the exception included a representation that the municipal securities are being purchased for the purchaser’s own account, with no present intent to sell or distribute the municipal securities,” wrote Naser. “This language reflects the realities of direct purchase transactions and, critically, that there is no intent that the securities will enter the public market.”
The GFOA said in its letter that the SEC should heed the ABA’s suggestion. Both the GFOA and SIFMA also commented that the SEC should expand the exception to include purchases by local governments and not just banks.
Muni advisors told the SEC that they object to being required to obtain CUSIPs, a task they view as outside the role of an MA.
“NAMA’s position is that no MAs – broker/dealer or independent – should be responsible for securing CUSIPs in competitive deals,” Gaffney wrote. “Rather, the underwriter should be the party responsible for obtaining CUSIPs, as they assist with the selling and trading of securities.”
Steve Apfelbacher, president of muni advisory firm Ehlers and a former MSRB board member, told the SEC that the proposal would be asking MAs to act outside their roles, potentially inviting controversy as to whether they would be operating in some cases as unlicensed broker-dealers.
“Requiring the municipal advisor to have a conversation with the purchasing entity about the intent of the purchasing entity is a conversation that crosses the line and is an underwriter activity,” Apfelbacher wrote. “Once that line is crossed, why are other transaction related conversations between the purchaser and municipal advisor not allowed?”
The SEC could choose to approve the MSRB proposal as written, or it could reject it. If the SEC does not approve the proposal, the MSRB could choose to make changes to it and re-submit it.
By Kyle Glazier
BY SOURCEMEDIA | MUNICIPAL | 10/12/17 07:25 PM EDT
The Municipal Securities Rulemaking Board (MSRB) today filed with the Securities and Exchange Commission (SEC) a proposed rule change to amend MSRB Form G-45 under MSRB Rule G-45, on reporting of information on municipal fund securities. The MSRB seeks to collect additional information about the transactional fees primarily assessed by programs established under the Stephen Beck, Jr., Achieving a Better Life Experience Act of 2014 (ABLE), as well as any variance in account maintenance fee based on the residency of the account owner.
The proposed rule change would require underwriters to ABLE programs as well as underwriters to 529 college savings plans to submit additional fee information, as applicable, beginning with the reporting period ending June 30, 2018. The reporting period ending June 30, 2018 is the first reporting period that underwriters to ABLE programs are required to submit data to the MSRB on Form G-45.
As broker-dealers prepare for bond markup rules slated to take effect by May 2018, questions remain about the implications for the fixed income industry as well as how broker-dealers will report trading disclosures to customers.
While few would argue the benefits of having a more transparent, easy-to-use mechanism in place to provide more information to the marketplace, broker-dealers are now tasked with devising a systemic, robust way of determining prices for securities, including values for hard-to-price, illiquid bonds. Yet, guidance from the Financial Industry Regulatory Authority and Municipal Securities Rulemaking Board has been vague, especially with respect to illiquid bonds.
The regulations approved by the Securities and Exchange Commission require dealers to disclose markups and markdowns on fixed income transactions for securities held for no longer than a day. This disclosure, which is calculated from the bond’s prevailing market price and expressed as a total dollar amount and percentage amount, is the culmination of a decades-long attempt to bring more transparency to a market where trades are largely conducted via telephone and prices are somewhat nebulous.
The new rules are designed to narrow the mark-up differential between what retail and institutional investors pay for similar trades. Regulators have long supported this oversight, claiming that retail fixed income customers almost never compare prices between dealers. In contrast to other types of securities, no central marketplace for bond quotes currently exists. As a result, rule makers argue that customers are in the dark regarding the often wide disparities between quotes provided by various broker-dealers. In fact, retail investors sometimes pay more than 2% in markup, while institutional investors only pay about 0.05%. While much of the higher markup for smaller retail trades factors in spreading the high cost of sourcing bonds over less principal, proponents of the regulations claim there is room to narrow the gap between retail and institutional trades.
While retail investors should certainly benefit from increased transparency, not everyone is sanguine about the prospects for these new regulations. Critics argue that investors already have access to price information through the FINRA and MSRB websites, and that markups are a fair way to generate income, just as traditional retail stores selling consumer goods have done for years.
In addition to adhering to the new regulations and navigating the challenge of implementing these new systems, broker-dealers are faced with a number of significant questions. Can markups be done manually? If fully automated, can they accurately tabulate prices for illiquid bonds?
Broker-dealers will now have to disclose markups on all trades for which they have an offsetting transaction that day, including those that do not fall under the category of riskless principal transactions. Transactions that fall outside of the “riskless principal” categorization occur when firms enter into trades that are undertaken as principal but then receive a client order for the same bond during the same day. In this scenario, firms are now required to disclose the markup, however there is often not an interdealer print from which to source the market price. As a result, the firm must resort to waterfall analysis – analyzing “comparable” bonds to determine the market price. This step is difficult to automate, and can provide unreliable data.
Waterfall analysis begins with an examination of trades in a specific bond. For illiquid bonds, data from other trades may not exist, and in this case broker-dealers are directed to use the pricing of “comparable” bonds in their analysis. This presents a significant challenge, as finding “comparable” bonds is much more of an art than a science, and again this process is difficult to automate.
Even more questions about the markup disclosure rule remain. Could these regulations meant to help retail investors cause some firms to stop servicing them because of the increased cost of compliance? How will commission be affected? Will broker-dealers be forced into a basis point model? How can these new systems be implemented within the next 12 months?
While questions certainly remain, markup disclosure rules are sure to change how retail investors and broker-dealers alike participate in the fixed-income market.
The Bond Buyer
By Mark Davies
October 16 2017, 11:38am EDT
Mark Davies is co-founder and chief executive office S3, which provides customized analytics tools that provide transparency into those factors impacting best execution.
To assist municipal advisor firms in complying with continuing education (CE) requirements, the Municipal Securities Rulemaking Board (MSRB) is providing a sample needs analysis checklist and training plan template. The fillable checklist and template is intended to help municipal advisor firms evaluate and prioritize their firm’s specific training needs and develop a plan for delivering appropriate training. View the Developing a CE Needs Analysis and Written Training Plan document here.
CE requirements for municipal advisor firms are outlined in MSRB Rule G-3 and effective January 1, 2018. The MSRB will host an educational webinar about the CE requirements on Thursday, October 12, 2017 at 3:00 p.m. Eastern Time. Register now.
The MSRB plans to provide additional webinars and resources throughout the year as part of its long-term goal to facilitate understanding of and compliance with MSRB rules.
The Municipal Securities Rulemaking Board (MSRB) today made available two new online courses for municipal market participants, adding courses covering MSRB rules on best execution and gift-giving to the MuniEdPro® catalog.
One course, Gifts, Gratuities, Non-Cash Compensation and Expenses of Issuance: MSRB Rule G-20, uses common scenarios to illustrate compliance with limitations and exclusions on the value of gifts and gratuities that regulated entities and their associated persons can give to officials of a bond issuer. The course also addresses restrictions related to expenses of issuance.
At the end of the course, the learner will be able to:
The other course, Best Execution of Transactions in Municipal Securities: MSRB Rule G-18, demonstrates how municipal securities dealers handle and execute customer transactions in municipal securities, and how to ascertain the best market by applying reasonable diligence and evaluating market conditions.
At the end of the course the learner will be able to:
Dealer and municipal advisor firms: enhance your firm’s compliance program by offering your municipal finance professionals access to all MuniEdPro® courses at the discounted rate of $100 per person. The discounted rate, which is available from October 1 to December 31, 2017, is a $270 value per person, saving firms over 60 percent on the course catalog.
For more information about MuniEdPro® or to inquire about subscription options, contact Ritta McLaughlin at rmclaughlin@msrb.org or 202-838-1306.
The following issue list highlights the BDA regulatory and legislative priorities over the past twelve months and the noted accomplishments achieved through direct Hill and regulator lobbying and by utilizing the BDA membership through meetings in Washington, DC and at BDA roundtables and conferences throughout the year. Thanks to your time and efforts, the BDA continues to expand our presence and impact and thus adds more value than ever to all member firms. Please don’t hesitate to contact me with any questions or comments.
Tax Reform and the Municipal Bond Tax-Exemption
After steady focus by the BDA over 8+ years, and while various tax reform proposals have been released by Congressional leaders and the administration, the tax-exemption remains out of scope and off the table – for now. Through direct federal advocacy with state and local government organizations, issuer groups and middle-market broker dealers, the BDA-led Municipal Bonds for America (MBFA) Coalition continues to be the leading voice in Washington to protect the tax-exemption for municipal bonds. The BDA and MBFA coalition will continue to ensure that the tax-exemption remains intact during the legislative process in tax reform this fall and into 2018.
FINRA Rule 4210
BDA was successful in getting FINRA and SEC to file a last-minute amendment to the rule in June 2016 that significantly expanded the “gross open position” exception from $2.5 million to $10 million. BDA had advocated for a more expansive gross open position limit throughout the rulemaking and the $10 million level does expand the universe of counterparties and trades where the transfer of margin will typically not apply. In May 2016, BDA submitted amendment language at the SEC’s request that would have exempted all transactions, including transactions over $10 million, if those trades settled on the next good settlement date. While, this advocacy didn’t result in the exact change BDA wanted, getting the $10 million exemption limit is a result of direct BDA advocacy at the SEC, especially. BDA had two fly-ins at the SEC to discuss this rule with Trading and Markets and the accomplishment is the higher “gross open position limit”. More recently, BDA was supportive of a delayed effective date and lobbied FINRA directly for the delay, which is a significant and valuable delay for BDA member firms who would have been challenged severely by a December 2017 effective date.
Retail Confirmation Disclosure Rules
As a result of direct engagement, including two joint meetings with MSRB and FINRA and a direct BDA Board Meeting with Robert Cook and Bob Colby at FINRA, Robert Cook specifically sought a BDA amendment recommendation for improving the rule. This proposed amendment was then subsequently sent to SEC for a discussion with Trading and Markets. The accomplishment is in the value of direct engagement in a member-engaged process that delivered a serious policy proposal to the regulators at their request.
MSRB Rule G-15 Minimum Denomination Rule
As a result of direct lobbying efforts of the BDA, the MSRB withdrew a proposed rule to amend MSRB Rule G-15 for minimum denominations (Proposed and withdrawn MSRB Rule G-49). The withdrawal of the rule took place after a BDA conversation with MSRB Counsel Mike Post that was supported by Dan Deaton from Nixon Peabody. During that call, BDA highlighted that the rule proposal and the existing G-15 framework was harming the marketplace, especially retail investors. After withdrawing the rule, the MSRB sought additional input from the BDA on conference call with BDA members. The accomplishment is that BDA advocacy resulted in the rule being withdrawn. BDA educated MSRB and they appear committed to updating G-15 in a way that would focus the minimum denomination rule on issuances with minimum authorized denominations of $100,000 and above, removing a significant burden on the retail municipal market.
DOL Fiduciary Duty
While the rule and exemptions are extremely burdensome, BDA and dealer firms were successful in getting significant changes included in the final rule. Initially the Best Interest Contract Exemption (BIC) and the Principal Trading Exemption excluded a series of assets including municipal bonds, UITs, CDs, and mortgage securities. While municipal bonds are still excluded from the Principal Trading Exemption (PTE), the other assets are not, and the list of assets that can be recommended to retirement investors under the Best Interest Contract Exemption is now unlimited.
Review and Withdrawal of IRS Political Subdivision Rule
The IRS political subdivision rule was proposed in 2016. BDA opposed the proposal. Due to market participant feedback the rule was not approved during the Obama Presidency. The Trump Administration review IRS rule proposals in 2016 and identified the political subdivision rule as a particularly burdensome rule. BDA and MBFA wrote to the IRS confirming that the rule was burdensome, unnecessary, and would harm economic growth. Currently, the proposal is identified as a rule that should be rescinded and this is very likely to occur in the fall of 2017. IRS repeatedly identified the comments of market participants as a reason why it identified this rule as particularly burdensome.
MSRB States Intent to not File Bank Loan Disclosure Concept Release
Although BDA is a proponent of bank loan disclosure, it opposed the MSRB’s concept release on bank loan disclosure. That proposal would have required MAs to be the party responsible for making the disclosure. BDA said it would be preferable to have an amendment to 15c2-12 which would make certain bank loans subject to material event notices. The MSRB stated that due to the comments it received it would not turn the concept release into a rule filing.
SEC Proposes Amendment to 15c2-12 for Bank Loan Disclosure
BDA supports the disclosure of bank loans and the most effective way to require the disclosure of bank loans would be for the SEC to amend 15c2-12. In 2017, SEC released a proposed rule to amend 15c2-12 to require the disclosure of bank loans. This proposal is a BDA accomplishment. While the rule is not yet final, BDA has engaged in direct advocacy with the SEC prior to and after the rule proposal on the subject of bank loans.
High Quality Liquid Asset (HQLA) Legislation/Regulation
Working in tandem with state, local, and issuer groups BDA has supported the introduction and re-introduction in the House and Senate and passage through the House of legislation to define municipal bonds as HQLA in the new banking liquidity rule. Additionally, BDA has urged federal banking regulators to amend the rule to allow municipal securities to be defined as Level 2A assets. Legislation to define municipal securities as HQLA (either as 2A or 2B) has bipartisan support and is discussed as a bill with a real chance to pass into law during this current session of Congress.
Potential
SEC Fixed Income Market Structure Committee
In August, BDA recommended four candidates (Craig Noble, Brad Winges, Horace Carter, Mike Marz) for the SEC’s Fixed Income Market Structure Advisory Committee. Since that time, we have contacted each SEC Commissioner and the Office of Municipal Securities.
Municipal Bonds for America (MBFA)
In 2016, the MBFA Coalition went through extensive transformation structurally to enhance its advocacy efforts in Washington and beyond. The Coalition instituted formal bylaws, which helped to improve how the coalition operates and functions. Additionally, the Executive Committee was refreshed with new and impassioned leaders, while maintaining the incoming president of the U.S. Conference of Mayors, Steve Benjamin as our Executive Chair. These actions have proved to be valuable as the Coalition continues to receive record turnout and Congressional participation through its Muni Bonds 101 seminars on Capitol Hill, meets with staff members of influence at the White House, and continues to develop and maintain its relationship with members of Congress to preserve the tax-exempt status of municipal bonds. The MBFA completed a data project in 2016 that focuses on key members of Congress on the House Ways & Means and Senate Finance Committees, which demonstrates “by the numbers,” the benefits of the municipal tax-exemption in the respective district or state of the member. The MBFA also led an effort in February 2017 that saw 385 organizations and individuals sign an advocacy letter, representing nearly all 50 states, to House and Senate leaders urging them to retain the current law status of municipal bonds as they begin deliberation on comprehensive tax reform.
Op-Eds
The BDA and MBFA continue to advocate for the value of municipal bonds and the importance they add to American society through various forms, including op-eds. For example: In September 2017, BDA Board Chair Tom Dannenberg was featured in Crain’s Chicago Business, commenting on the disbanded White House Advisory Council on Infrastructure and touting the essential role of municipal bonds in financing our nations growth, which drives our economy. Also, in September 2017, MBFA Executive Chair Steve Benjamin, mayor of Columbia, SC, was featured in an article in The Hill that focused on how those faced with the devastation left behind by Hurricanes Harvey and Irma can look to the traditional bond market to rebuild stronger, smarter, and more resilient communities. In November 2016, BDA CEO Mike Nicholas contributed to an op-ed in The Hill, which highlighted the importance of tax-exempt bonds as a viable solution for project finance and was written in response to the piece, “Bonds are Taxes,” that argued local governments have the capacity to pay for needed projects out of current tax revenues.
Bond Dealers of America
October 2, 2017
The National Federation of Municipal Analysts has a committee to review releases and new standards from the Governmental Accounting Standards Board. They have prepared a summary of changes related to GASB 87, New Governmental Lease Accounting Standards.
To download this summary, click here.
Law360, Washington (October 3, 2017, 6:41 PM EDT) — The U.S. House of Representatives passed a bipartisan bill Tuesday that would spread a Federal Reserve rule on the treatment of municipal securities across the financial industry.
Rep. Luke Messer’s Municipal Finance Support Act of 2017, which passed on a voice vote Tuesday, would mandate that banks treat otherwise qualified municipal debt as part of their calculations of high-qualified liquid assets under the liquidity coverage rule. That corrects what Messer, R-Ind., called an unintended effect of the liquidity coverage rule that raised borrowing costs for municipalities and put domestic municipal securities against similar foreign municipal securities.
“Frankly, they messed up,” Messer said, referring to a prohibition on the treatment of municipal securities as high quality liquid assets.
Messer and others said the legislation is needed to correct a problem with the calculation of the liquidity coverage ratio, a measure of assets that can be easily converted into cash should a financial institution face a sudden cash crunch.
The original liquidity coverage ratio rules by the Fed and other agencies did not allow banks to include municipal securities in their measures of high-quality liquid assets over concerns that those securities would not be as easily sold as corporate debt, Treasury securities or other assets that were included.
After an outcry from municipalities, legislators and others, the Fed revisited the issue in 2016. Its final rule allowed all the banks it regulates with $50 billion or more in assets, plus any nonbank firms designated as systemically important financial institutions, to include debt issued by local governments in their calculations.
The Federal Reserve’s final rule is similar to Messer’s bill, but the Office for the Comptroller of the Currency and the Federal Deposit Insurance Corporation did not issue updates to their 2014 rule since the Fed changed its high-qualified liquid asset calculations. The bill passed by the House Tuesday would require the regulating agencies to treat all municipal securities that would otherwise meet the rule’s HQLA qualifications the same as other financial instruments.
Rep. Bill Huizenga, R-Mich., and others said the continued exclusion of municipal securities from the liquidity coverage calculation would hurt municipalities because their otherwise high-quality securities would be less attractive to financial institutions.
“Excluding municipal securities from treatment as HQLAs will result in higher borrowing costs for municipalities in times of financial strain for state and local governments,” Huizenga said.
Rep. Maxine Waters, D-Calif., one of the Democratic backers of the bill, noted that not every town across the country would benefit from the change, but “for those who do, I think it is important for us to recognize that when we have the opportunity to come together to make borrowing easier for municipalities.”
Waters noted that the bill would correct a regulatory split for municipal securities, where the governing law would change depending on the institution.
Messer’s bill, which had Republican and Democratic backing, would also require that the Federal Reserve, the FDIC and the comptroller of the currency all issue new regulations to handle the change.
Under the new rule, qualifying municipal securities would have to be treated as at least Level 2B liquid assets, which corresponds to as much of a 50 percent “haircut” on the asset’s face value in the calculation.
A similar bill is being considered by the U.S. Senate Banking Committee.
By Michael Macagnone
–Additional reporting by Evan Weinberger. Editing by Jill Coffey.
Just in the last weeks of August, the Public Finance Abuse Unit of the Enforcement Division of the Securities and Exchange Commission (SEC) announced settlements of securities fraud actions involving a city, an underwriter, a municipal advisor and four individuals. The first case concerned inaccurate descriptions by a city of its prior compliance with continuing disclosure undertakings. This was the second instance of SEC enforcement following closure of the voluntary reporting program known as the Municipalities Continuing Disclosure Cooperation Initiative (MCDC).[i] The other case was brought against a financial advisory firm for violation of the Dodd-Frank Act obligation that municipal advisors owe a fiduciary duty to their municipal clients. This is one of the first cases to explore the meaning of fiduciary duty for municipal advisors.[ii]
I. Beaumont, CA Finance Authority and O’Connor & Company Securities, Inc. and Anthony Michael Wetherbee (August 23, 2017)
Beaumont, CA (a small city between Los Angeles and Palm Springs) created a joint powers authority (the Beaumont Financing Authority, or BFA) to issue bonds on behalf of a Community Facilities District (CFD) to fund infrastructure for housing developments. The CFD signed numerous Continuing Disclosure Agreements (CDAs) in connection with the BFA’s bonds requiring annual reports on many aspects of the developments such as tax delinquencies, description of facilities financed, fund balances, etc. During a period from 1995 to 2015, Alan Kapanicas was Beaumont’s City Manager and Executive Director of the BFA, and was responsible for overseeing all of the bond issuances and CDA reporting.
Between 2012 and 2013, five bond issuances by the BFA were solely underwritten by a small firm, O’Connor & Company Securities, Inc. (O’Connor). According to the SEC, each of the Official Statements (OS’s) in these five issues contained a misstatement about the CFD’s compliance with its CDAs. The OS’s reported one late filing of an annual report, and stated that except for this occurrence, the CFD had not failed to meet its continuing disclosure obligations. The SEC stated that, in fact, the OS’s failed to disclose many other late filings, up to 117 days, and that every annual report was missing one or more elements of information required by the CDA.
Had the BFA and the underwriter reported these instances under MCDC, they would have been subject to certain pre-arranged sanctions. Now, the sanctions were more severe:
1. Beaumont Financing Authority entered a cease and desist order, neither admitting nor denying the SEC’s charges, in an administrative proceeding based on violations of Section 17(a)(2) and (3) of the Securities Act of 1933 (a charge based on negligent, rather than purposely intentional, action to make a material misstatement of facts to investors). There was no monetary penalty, although compliance with the settlement terms will cost the City some money. The BFA is required to establish policies and procedures and training for securities law and CDA compliance, and for accounting and record-keeping for bond proceeds. BFA is also required to bring all existing CDA filings up to date if not in compliance. These sanctions are similar to but a little more detailed than those applied in the 71 MCDC issuer settlements. A new requirement for BFA (which previously applied to underwriters under MCDC but not issuers) is to engage an independent consultant to provide a review and recommendations to the BFA on the matters subject to new policies and procedures. BFA must comply with such independent consultant’s recommendations, subject to appeal to the SEC. As with the MCDC settlements, BFA must disclose this settlement in its OS’s for five years.
This action reinforces the importance for all issuers to make sure that they have policies and procedures in place to comply with their continuing disclosure agreements.
2. Alan Kapanicas was sued in Federal District Court based on the facts described above, alleging violations of Sections 17(a)(2) and (3). The SEC only released the Complaint in the action, but its press release indicated that, without admitting or denying the charges, Kapanicas agreed to the entry of permanent injunctions against violating Sections 17(a)(2) and (3) and against participating in any offering of municipal securities. He also agreed to pay a civil fine of $37,500.
This post-MCDC action is significant in that no individual officials were included in any of the 71 issuer settlements. This is consistent with recent SEC policy in which individual officials are included in virtually every new enforcement action involving issuers, and who are usually required to pay some civil fine. Also, as noted above, the sanctions against the issuer entity were somewhat more severe and costly than the issuer would have faced if it had reported under MCDC.
3. O’Connor and its lead underwriter, Anthony Wetherbee, settled administrative proceedings brought under Sections 17(a)(2) and (3), several MSRB Rules, and a section of the 1934 Act which prohibits licensed dealers from violating MSRB Rules. Without admitting or denying the SEC’s charges, which were based on failure of adequate diligence in determining if the BFA’s description of its CDA compliance was accurate, the following sanctions were imposed:
A. O’Connor is required to engage an independent consultant to review its policies and procedures, and comply with its recommendations. This is similar to the MCDC settlements. O’Connor agreed to a cease and desist order, was censured and was required to pay a civil fine of $150,000, which is larger than it would have paid under MCDC.
B. Weatherbee agreed to cease and desist from violating Section 17(a)(2) or (3), and is barred for 6 months from association with any municipal dealer, any investment company, or participating in any issuance of penny stocks. He also has to pay a civil fine of $15,000. None of the 72 underwriter settlements in MCDC included any individuals.
II. Municipal Financial Services, Inc.; Rick A. Smith; and Jon G. Wolff (August 24, 2017)
The SEC brought an administrative action against Municipal Financial Services, Inc. (MFS), a registered municipal advisor (MA) based in Oklahoma, and two of its principals, Smith and Wolff. MFS was hired by an unidentified city in 2011 (City) to act as its MA and to be responsible for preparing the City’s OS’s for bond offerings, reviewing and commenting on all legal documents for bond issuances, and for assisting the City in compliance with its CDAs.
The City had three bond issues from 2005, 2008 and 2012 which all required annual reports to be filed within 180 days of the end of its fiscal year. In a 2013 bond issue, the City’s bond counsel (a sole practitioner now retired) wrote a CDA providing for a 360 day deadline to file its CDAs, and which purported to amend the three prior CDAs to move to a 360-day reporting deadline.
The SEC alleged that MFS violated its fiduciary duty to the City by failing to advise the City that moving to the new 360-day reporting deadline violated the provisions of the 2005, 2008 and 2012 CDAs and that it did not advise the City until three years later to notify bondholders of those prior issues that the CDA deadline had been changed. These actions (carried out by Smith and Wolff) violated Section 15B(c)(1) of the 1934 Act which requires MAs to act in a fiduciary capacity with their clients, and to use reasonable care to avoid misleading clients.[iii]
MFS was censured, agreed to cease and desist from further violations of Section 15B(c)(1), and paid a civil fine of $50,000. MFS was also ordered to establish written policies and procedures and periodic training on the fiduciary obligations owed to municipal clients. Smith and Wolff each agreed to pay a civil fine of $8,000.
There are a couple of interesting points in this case. One is that the SEC pointed out that based on advice given in a 1995 letter to the National Association of Bond Lawyers, it is very difficult for an issuer to unilaterally amend a CDA. The SEC strongly implied (although it did not say expressly) that this City’s retroactive amendment of its 2005, 2008 and 2012 CDAs was improper, substantively as well as procedurally, since the City’s bond counsel did not follow the provisions in those CDAs to make an amendment. Essentially, MFS was sanctioned for failing to tell the City that it could not make such amendments.
Another point to note is that this case was based on the fact that MFS’s failure to properly advise the City was serious because investors in the three older bond issues were harmed by not getting their CDAs in the time frame originally promised to them. One commentator raised the question of whether the SEC was trying to do another “round-about” regulation by suggesting that an MA owed a duty to investors, but others point out that since in this case MFS had an express contractual duty to the City to help it with CDA compliance, the outcome was not surprising.
by Roger Davis, Robert Feyer, and Alison Radecki
September 27, 2017
Orrick, Herrington & Sutcliffe LLP
[i] Under MCDC, issuers and underwriters were given the opportunity to voluntarily report to the SEC instances in which the issuer erroneously stated in an Official Statement that it had materially complied with all of its obligations under continuing disclosure agreements for the past five years. The SEC offered a pre-arranged suite of sanctions, relatively mild, for those who participated in the program, but promised harsher penalties for those who did not. Ultimately the SEC settled with 72 underwriting firms and 71 issuers under the MCDC program.
[ii] For more background on the SEC’s municipal enforcement activities, please access the recent Orrick – Bond Buyer Webinar.
[iii] This action was based solely on the statutory provision enacted by the Dodd-Frank Act. Subsequent to the time covered by this action, the Municipal Securities Rulemaking Board enacted Rule G-42 which spells out in more detail the duties and responsibilities of municipal advisors to their clients.
In support of our ongoing efforts to more fairly and equitably assess fees among regulated entities, the Municipal Securities Rulemaking Board (MSRB) today filed with the Securities and Exchange Commission (SEC) amendments to MSRB Rule A-11, on assessments for municipal advisor professionals, to increase the annual municipal advisor professional fee to $500 from $300.
The municipal advisor professional fee will be assessed based on the number of associated persons for whom the firm has filed a Form MA-I with the SEC as of January 31 of each year and who are qualified as a municipal advisor representative in accordance with MSRB Rule G-3. The first invoice at the new fee level will be sent to firms in April 2018 for payment by April 30, 2018.
In 2015, the MSRB conducted a holistic review of the organization’s funding sources, which is informing efforts to more equitably assess fees among regulated entities. When the first changes stemming from that review were approved in 2015, we did not increase the municipal advisor professional fee to allow municipal advisors time to adapt to regulation post Dodd-Frank. We noted at the time that we would revisit the amount of the fee, considering the substantial costs associated with developing and maintaining a regulatory regime for municipal advisors.
We believe the fee assessment of $500 per municipal advisor professional is an important step toward supporting the organization’s long-term financial sustainability and ability to fulfill its Congressionally mandated mission to protect the integrity of the $3.8 trillion municipal securities market. Going forward, we will continue to periodically reevaluate all fees to strive to fairly and equitably allocate fees across the entities that fall under the organization’s regulatory mandate.
SIFMA called for the exemption of tender option bonds from Volcker rule restrictions in a comment letter to the Office of the Comptroller of the Currency on revisions to the post-crisis financial regulation. “Treating these TOBs and other similar financing vehicles as covered funds is inconsistent with the statute and ultimately results in higher financing costs for US businesses,” SIFMA wrote.
PHOENIX – Issuers should not be the ones selecting underwriter’s counsel in bond transactions because the practice, while common, gives rise to serious conflict of interest concerns, the Municipal Securities Rulemaking Board said Thursday.
The MSRB noted that the practice of issuers either selecting or influencing the selection of underwriter’s counsel for a transaction remains widespread, despite long-held concerns previously raised by the board. The MSRB was worried about the issue as far back as 1997. In 1998, it issued a notice stating that there were “demonstrated problems regarding the practice” and that underwriters must feel free to select their own lawyers in transactions.
“This practice gives rise to actual or potential conflicts of interest in the counsel’s representation of the underwriter, and calls into question counsel’s ability to carry out its responsibilities with the necessary degree of independence from the issuer, to act with undivided loyalty and to be free from conflicting allegiances in providing legal counsel to the underwriter,” the MSRB said in the advisory notice it released Thursday. “Issuer designation of counsel also may compromise an underwriter’s ability to retain counsel that has the requisite expertise and experience with the federal securities laws, and the resources needed to assist the underwriter in fulfilling its due diligence responsibilities.”
The Government Finance Officers Association’s current best practices on underwriter selection do not address whether issuers should avoid designating the underwriter’s counsel, but note that issuers and their municipal advisors inherently sit on the opposite side of the deal table from underwriters.
“The MSRB is responding to the continuation of this practice with this market advisory to restate its concerns that investors may be harmed in a variety of ways in any offering process that does not properly utilize the review, guidance and counseling of an independent, competent and appropriately critical underwriter’s counsel,” the advisory concluded.
“To minimize conflicts of interest and to reduce any influence by an issuer that may call into question the qualifications or independence of the underwriter’s counsel, the MSRB suggests that an issuer refrain from involving itself in the underwriter’s selection of counsel or that an issuer’s involvement in such process be minimal and limited to concerns regarding competency, conflicts of interest and the avoidance of excessive costs.”
By Kyle Glazier
SOURCEMEDIA | MUNICIPAL | 07/27/17 07:08 PM EDT
CARLSBAD,CALIF. – The Municipal Securities Rulemaking Board should be focusing its time and resources on being more efficient, rather than commenting on issues over which it has no authority, lawyers said Monday.
Their comments came during a panel discussion on market disclosure and pricing transparency at The Bond Buyer’s California Public Finance Conference.
The panel discussion turned to recent MSRB activities and the board’s associate general counsel Margaret “Peggy” Blake was among the speakers.
Her fellow panelists took some issue with the MSRB’s recent issuance of a notice aimed at issuers, urging them not to selectively disclose information only to certain investors. While the MSRB does have a federal mandate to protect issuers, it has no authority to regulate their activities.
The notice, published on Sept. 13, warned that issuers face the potential for fraud charges if known material information is omitted from required public disclosures. Information generally has been deemed to be material under case law if there is a substantial likelihood that it would be considered important by a reasonable investor making an investment decision.
Dave Sanchez, a senior counsel at Norton Rose Fulbright, said he applauded the MSRB for its efforts to evaluate the efficiency of its current rulebook, a project the board began this year after finally finishing a lengthy list of federally-mandated rulemaking.
But Sanchez added that the board shouldn’t be collecting fees from regulated broker-dealers and municipal advisors and then spending time and money talking about issuer behavior rather than undertaking the comprehensive review of its rules that the board has underway.
“If you have a kitchen renovation in progress, you shouldn’t be out mowing the neighbor’s yard,” Sanchez said.
Leslie Norwood, a managing director, associate general counsel, and co-head of municipal securities at the Securities Industry and Financial Markets Association reacted to that statement with an “Amen.”
The directive coming down from the Trump administration emphasizes evaluating current rules for ways to make them more efficient, she said, adding, SIFMA supports those efforts.
“We applaud any push toward efficiency,” said Norwood.
Bill Oliver, the industry and media liaison for the National Federation of Municipal Analysts, expressed a less forceful opinion of the MSRB notice. But he noted that warning issuers against disclosure can have negative impacts.
“Anytime you tell people they should be careful about what they tell investors, it always leads to less information,” he said.
Blake said that the MSRB’s notice was merely guidance and in no way prescriptive, and had actually been well-received.
“Believe it or not, we have gotten a lot of positive feedback,” she said.
Panelists also discussed other disclosure issues, including the SEC’s proposal to amend its Rule 15c2-12 in a way that would require issuers to file material event notices to EMMA when they incur a material financial obligation such as a bank loan, as well as when debt becomes subject to certain provisions such as one that calls for an acceleration of payments.
Norwood reiterated dealer concerns that such information is sometimes difficult for underwriters to find, leaving them potentially liable if they underwrite bonds with shoddy disclosure.
Oliver said such information clearly needs to be disclosed.
By Kyle Glazier
BY SOURCEMEDIA | MUNICIPAL | 09/27/17 07:06 PM EDT
Proposed Rule Change to Amend Section 13 of Schedule A to the FINRA By-Laws Relating to the Review Charges for Communications Filed with or Submitted to FINRA
Financial Industry Regulatory Authority, Inc. (“FINRA”) is filing with the Securities and Exchange Commission (“SEC” or “Commission”) a proposed rule change to amend Section 13 of Schedule A to the FINRA By-Laws (“Section 13”) governing the review charges for communications filed with or submitted to FINRA’s Advertising Regulation Department (the “Department”) to account for upcoming technological changes that will allow websites to be filed in native format.
PHOENIX- Legislation defining readily tradeable, investment-grade municipal securities as high quality liquid assets under federal banking rules may have a window to move forward fairly soon, according to market groups watching developments on Capitol Hill.
The Municipal Finance Support Act of 2017, H.R. 1624, sponsored by Rep. Luke Messer, R-Ind., was reported out of the House Committee on Financial Services Sept. 12 after receiving unanimous support in late July.
The bill is a response to rules adopted by the Federal Reserve Board, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corp. in 2014. These rules require 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 HQLA to total net cash outflows – to deal with periods of financial stress.
The regulators did not include munis as HQLA under the rule because they felt the securities were not liquid enough.
The Fed later amended its rules to include some munis as HQLA but muni market participants said the amendments were still too restrictive and, in any case, would mean little if the other banking regulators did not ease their rules as well.
Messer’s bill has been amended to require the regulators to treat munis that are investment grade and actively traded in the secondary market as level 2B HQLA, the same level as mortgage backed securities, down from its original requirement that they be treated as level 2A securities on the same level as sovereign debt.
This change reconciles it with a Senate bill, S. 828, sponsored by Sen Mike Rounds, R-S.D. The House approved legislation making some munis 2A assets last year, but it never advanced in the Senate.
“The House is expected to act on the bill soon,” the National Association of State Treasurers said in a legislative update posted for members Sept. 17. “The House bill as reported out of committee now conforms with the Senate 2B legislation, which increases the likelihood that the bill could be signed into law.”
The NAST update said that S. 828, currently awaiting action by the Senate Banking Committee, is considered likely to come up when the committee next takes action on several financial services-related bills.
“A unanimous vote in support could clear the way for the bill to be ‘hotlined,’ a Senate procedure that would allow for expedited consideration and passage,” the NAST update said.
The question now remains when and if the House will act on the bill now that it is awaiting floor action. It could be considered as a stand-alone bill, or it could end up being attached to a larger bill, such as tax reform legislation.
Emily Brock, director of the Government Finance Officers Association’s federal liaison center, said her sense is that lawmakers might be inclined to deal with bipartisan legislation like Messer’s bill before the anticipated difficulty of a tax reform showdown. Brock said that when GFOA last met with legislators on this issue, the energy was very positive.
“This is a light lift,” she said.
The House’s agenda is ultimately determined by House Speaker Paul Ryan, R-Wisc., and other Republican leaders.
The Bond Buyer
By Kyle Glazier
09/18/17
The DOL published a proposed rule to extend the transition period for the Department of Labor Fiduciary Duty Rule. The proposal would delay the applicability dates for the Best Interest Contract Exemption and the Principal Trading Exemption until July 1, 2019.
BDA Comment Letter
BDA submitted a comment letter on Friday, September 15th. The letter can be read here. The letter references and echoes the letter BDA sent to the DOL on August 7th. Both letters support an extended transition period.
BDA urges the DOL to continue its review per the directive of the February 2017 Presidential Memorandum and to coordinate with the SEC on a harmonized best interest standard of care for all retail investment accounts.
Bond Dealers of America
September 18, 2017
Washington, DC – More than 3,000 individuals at 505 municipal advisor firms across the country are now qualified to provide advisory services to state and local governments and other clients following implementation of the first mandatory qualifying examination for municipal advisor professionals, the Municipal Securities Rulemaking Board (MSRB) announced today.
“Municipal advisors play an important role in the municipal securities market as trusted experts whose advice can have a profound impact on the financial health of state governments, local communities and other municipal entities,” said MSRB Executive Director Lynnette Kelly. “The MSRB’s exam is designed to ensure that only those individuals who can demonstrate their knowledge of regulatory standards of conduct and current market practices can hold themselves out as municipal advisor professionals.”
Effective September 12, 2017, the MSRB’s Municipal Advisor Representative Qualification Examination (Series 50 exam) is a required baseline test of competency for professionals who provide advice on the issuance of municipal securities or use of municipal financial products.
Date: September 21, 2017
Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org
While many would prefer the SEC’s MCDC Initiative be a distant memory, on August 23, the SEC’s Chief of the Enforcement Division’s Public Finance Abuse Unit reminded issuers and underwriters alike that “[i]ssuers and underwriters will continue to be held accountable when they fail to provide investors with an accurate picture of past compliance with continuing disclosure obligations.” SEC Press Release, Muni Bond Issuer and Underwriter Charged With Disclosure Failure, 8/23/2017.
In an Order Instituting Cease and Desist Proceedings, Making Findings and Imposing Sanctions and a Cease and Desist Order (“Order”), the SEC followed through on its commitment to focus on market participants that had not voluntarily self-reported under the MCDC initiative. The SEC’s press release highlighted that the Municipal Finance Authority in Beaumont, California (“Beaumont”), its then-executive director and the underwriting firm behind certain offerings had settled charges that Beaumont had made false statements about compliance with continuing disclosure obligations and the underwriter failed to conduct reasonable diligence.
This Order (and the O’Connor Order demonstrate that the SEC is not done focusing on disclosure by issuers and diligence by underwriters and that the penalties for parties that did not voluntarily self-report under MCDC will be more severe.
In its Legal Discussion, the Order set forth the legal basis for holding the issuer accountable and, as emphasized below, noted that “negligence is sufficient to establish violations.” The Order provided, in part: Section 17(a)(2) of the Securities Act makes it unlawful “in the offer or sale of any securities … directly or indirectly … to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.” 15 U.S.C. § 77q(a)(2). Section 17(a)(3) of the Securities Act makes it unlawful “in the offer or sale of any securities … directly or indirectly … to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.” 15 U.S.C. § 77q(a)(3). Negligence is sufficient to establish violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act. See Aaron v. SEC, 446 U.S. 680, 696-97 (1980). A misrepresentation or omission is material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision. See Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988). Order at para. 17. Emphasis Supplied.
The SEC held the issuer, the City Manager and the underwriter accountable and, in each instance, imposed “undertakings” well beyond what was required of those that submitted and settled with the SEC under its MCDC initiative.
For issuers and their officials, there are several takeaways from these Orders that are beyond what was required by those that voluntarily submitted and were subject to Orders under the MCDC initiative:
There is another message that shouldn’t be overlooked. Accountability seemingly begins and ends with the issuer and underwriter even where, as in Beaumont, a dissemination agent was engaged by the issuer. A review of outstanding Official Statements shows Beaumont engaged a dissemination agent. While the Order does not discuss the role of the dissemination agent, it does highlight missed and late filings, the failure of the district to properly disclose the same and the fact that the Executive Director was responsible for reviewing and approving the content of the OS.
While many dissemination agents do a fine job filing on behalf of the obligated party, the mere fact that an obligated party uses a dissemination agent does not absolve it from having policies, procedures and practices to ensure obligations are met and, where not met, properly discussed. Over-reliance on a dissemination agent can be fraught with risk. The parties cannot simply point to a dissemination agent as being responsible to fulfill its legally required obligations.
What’s an issuer and obligated party to do? As highlighted in our May 25, 2017 commentary and below, the MCDC Issuer Cease and Desist Orders (“MCDC Orders”) and the GFOA’s August 24, 2016 Alert to Members (“GFOA Alert”) provide excellent starting points. In addition, the engagement of an independent third party to review CDA obligations and actual filings can be a critical part of your policies, procedures and practices. Having the party responsible for making the filings (be they an employee of the obligated party or a dissemination agent) conduct such a review puts that party in the awkward position of self-reporting their own failures where a filing is late or missed and, as some have opined, might be considered a conflict of interest.
The MCDC Orders, in part, require issuers to:
The GFOA Alert provided “essential practices” that, combined with the SEC Orders, can serve as best practices for Issuers. It provides, in part:
As issuers and obligated parties digest the Beaumont Order in conjunction with the MCDC Orders and their obligations under 17(a)(2), it is prudent they contemplate a Disclosure Management policy and practice to ensure an understanding of filing obligations, an understanding of what has or has not been filed properly and a process to be alerted of current filing obligations. Any Disclosure Management policy and practice should include an independent review to confirm filings are done properly.
The Bond Buyer
by Gregg Bienstock
September 05 2017, 2:11pm EDT
Gregg Bienstock is chief executive officer and co-founder of Lumesis Inc.
Washington, DC – As part of its ongoing commitment to reviewing existing rules in light of an evolving municipal marketplace, the Municipal Securities Rulemaking Board (MSRB) today published a concept proposal to solicit input from market participants on MSRB rules on primary offering practices.
“Issuing a concept proposal is an important way for the MSRB to collect information that helps us understand the varied perspectives of municipal market participants and determine whether there are in fact issues to be addressed, either by advancing a rule proposal or considering alternative approaches such as providing guidance,” said MSRB Executive Director Lynnette Kelly.
Today’s concept proposal seeks insight on evolving primary offering practices and whether the current rules continue to operate effectively or whether changes to MSRB Rule G-11, on primary offering practices, and Rule G-32, on disclosures in connection with primary offerings, may be warranted.
“After a series of very helpful informal discussions with a diverse range of market participants, the MSRB came away with several questions that we want to put to the market more generally,” Kelly said. “Our goal is to learn what, if any, regulatory proposals, guidance or educational resources may be beneficial to enhance the fairness and transparency of the primary offering process for municipal bond investors, issuers and syndicate members.”
Comments on the MSRB’s concept proposal should be submitted no later than November 13, 2017. View the concept proposal.
Date: September 14, 2017
Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org
The National Federation of Municipal Advisors has responded to the Governmental Accounting Standards Board’s Invitation to Comment: Proposed Statement No. 3-30, Certain Disclosures Related to Debt, Including Direct Borrowings and Direct Placements.
To read the letter, click here.
Read the BDA Advocacy Priorities.
September 5, 2017
PHOENIX – The Securities and Exchange Commission and Department of Justice are primed to prosecute high-ranking public officials, bond lawyers, and other non-traditional targets of municipal bond enforcement cases, according to a former SEC enforcement division lawyer.
That is the prediction of Peter Chan, a lawyer in the Chicago office of Morgan Lewis who spent some 20 years with the SEC, including as chief muni enforcer in the commission’s Chicago regional office.
Chan was the architect of the SEC’s Municipalities Continuing Disclosure Cooperation initiative, which incentivized issuers and dealers to self-report instances in which issuers made misleading statements about their past compliance with continuing disclosure agreements.
In a lengthy interview with The Bond Buyer, Chan said he believes there has been no slowing of momentum for muni enforcement since MCDC’s end and that regulators may become even more aggressive going forward.
“I think it is quite safe to say that there continues to be consensus and momentum on SEC enforcement of the municipal securities market,” Chan said.
While some market participants had wondered if the commission’s attitude might shift with the departure of former chair Mary Jo White, known as an aggressive criminal prosecutor, Chan said that it appears new SEC chair Jay Clayton is on board with the enforcement division’s agenda and with projects like the MCDC initiative.
“Reading the tea leaves, he does not have any problem with the initiative,” Chan said.
Republicans like Clayton have been historically receptive to the idea of holding individuals accountable, Chan said, which is in line with what the SEC has been trying to shift towards for several years in either charging firm or issuer officials or explaining why it declined to do so.
“If entities commit fraud that means individuals commit fraud,” Chan said. “There will be a focus on that.”
The SEC has sharpened the tools it uses to hold individuals to account. The commission can charge individuals for “causing” others to violate securities laws, and it can also use the doctrine of “control person liability,” which the SEC deployed to charge the mayor of Allen Park, Mich. in November 2014. Control person liability comes from section 20(a) of the Securities Exchange Act of 1934 and provides that an individual may be liable for the securities law violations of persons over whom they exercise control.
“The Public Finance Abuse Unit can use that to go up the chain,” Chan said. “Not only will they focus on individuals, they will look into how far up they can go. They’re not going to want to go after just a low tier bureaucrat.”
The SEC has charged a number of public officials over the years, but that has rarely extended to the upper floors of city hall.
The commission will not seek to charge an individual that way every time, Chan said, but will always be asking the question of whether it should be and taking a “holistic” view of every case.
“They basically ask a very holistic question: who are the people who contributed to the disclosure problems?”
Chan said he has observed an increasing willingness of the SEC to go after “gatekeepers” such as auditors in other markets, and expects that trend to carry over to the muni market. The SEC last year charged a New York-based audit firm and one of its senior partners in connection with municipal bond offerings by the town of Ramapo, N.Y. Bond lawyers might increasingly become targets of prosecution in some instances, too, Chan warned.
Last month, when the SEC charged Oklahoma-based municipal advisor Municipal Finance Services
with breaching its fiduciary duty, the order mentioned that one offending continuing disclosure document was produced by bond a bond lawyer “who is now retired and no longer practicing law.” Chan said that could be read as a justification from the SEC as to why it was not pursuing charges against the lawyer, though it could have been contemplating them.
“I thought that was a bit of a hint,” Chan said. The SEC also charged the founder and president of the firm as well as its vice president.
When it comes to battling public corruption, the DOJ might be looking to increasingly take a page out of the SEC’s playbook, Chan added. While courts have ruled that traditional criminal public corruption charges require evidence of a quid pro quo, the securities laws, which can also be the basis of criminal charges, do not.
Prosecutors merely have to show that an official withheld a material fact, including a conflict of interest. Prosecutors could make the case that an official should have disclosed a gift from, or financial relationship with, a party to a bond transaction, Chan said.
“The DOJ is going to get pretty interested in using federal securities law to go after public corruption,” Chan said.
As for his own creation, the now-complete MCDC, Chan said he believes the SEC is likely to view it as a “resetting of the table.” The program created a major market dialogue and forced issuers to confront their past errors, and the SEC will likely expect that their message was received, Chan said.
“I don’t think the SEC will be very receptive to issuers claiming a lack of sophistication,” he said, adding that disclosure violations taking place after the MCDC’s 2014 reporting period are likely going to see harsh sanctions.
The MCDC may be a major intelligence tool for the enforcement division going forward, because so many deals were reported. The SEC has computer analytical tools to allow it to sift through that data and find things it might not otherwise have discovered, he said. The commission has used big data analytics in other markets and the public finance unit has those tools now as well.
“The are likely applying that same type of big data analytics to the treasure trove of data they received,” Chan said.
The Bond Buyer
By Kyle Glazier
Published September 08 2017, 1∶37pm EDT
On August 25, SIFMA submitted comments to the Securities and Exchange Commission (SEC) on the Municipal Securities Rulemaking Board’s (MSRB) proposed rule change to assess an underwriting fee on dealers that are underwriters of 529 college savings plans. SIFMA and its members strongly urged the SEC to institute disapproval proceedings regarding the filing in its current form, and does not believe the proposed fees as currently structured are appropriate, as they would stifle competition.
A fair and efficient municipal marketplace depends on a shared commitment of all participants to disclose information fairly, equitably and in the public domain.
Bond issuers, for their part, support market integrity by disclosing certain important information to investors throughout the life of a bond. This information helps investors and others make informed decisions. Selective disclosure—an often-unintentional sharing of material, nonpublic information to a select group of investors—creates an information imbalance, giving certain market stakeholders access to more information than others.
As the regulatory agency responsible for preserving market integrity, the Municipal Securities Rulemaking Board encourages issuers to make important current information available to all. Our Electronic Municipal Market Access (EMMA®) website is the official nationwide repository for free public access to material information about municipal securities. It provides the means for full and fair municipal bond disclosure, and a simple means for issuers to address any inadvertent selective disclosure.
Federal regulations prohibit selective disclosure by public companies. Regulation FD —for “Fair Disclosure”—prohibits public companies from making intentionally selective disclosures and requires prompt public disclosure following any inadvertent selective disclosure. Issuers of municipal bonds are not subject to any similar regulations but can support market integrity by ensuring that all market stakeholders receive the same information at the same time. Adding a voluntary filing on EMMA is a simple step to ensure that information that may have been shared in a private setting is promptly available to the public at large.
Selective disclosure often occurs unintentionally. Municipal officials who stick around at the end of a town hall meeting with a few constituents and casually mention additional information about bond projects not raised during the public meeting could be inadvertently making selective disclosure. It also can happen when issuers or members of their deal team host roadshows, investor conferences and one-on-one investor calls or meetings. These events themselves are not inherently problematic, but they can become so if the information shared is material to all bondholders and not made public.
Selective disclosure in the municipal market can be more troubling in instances of credit distress, when some stakeholders’ interests may be at odds.
Take, for example, Puerto Rico, which is confronting an ongoing debt crisis with many competing interests at stake. In August 2014, the Puerto Rico Power Authority (PREPA) pledged to provide monthly cash reports, vendor agreements, budgets, and other information to owners and insurers controlling over 60 percent of its outstanding revenue bond debt. In exchange, the participating creditors that received confidential information were required to sign confidentiality agreements and waived their rights to sue PREPA for a period of time. Other stakeholders were not part of this arrangement, putting them at an information disadvantage.
The MSRB recommends that municipal bond issuers carefully manage their response to both intentional and accidental instances of selective disclosure. Issuers may open themselves up to federal fraud charges if they make material omissions or misstatements in their public disclosures. If something was material enough to mention in private, it may well have merited public disclosure.
Some market observers may fear that increasing regulatory attention on selective disclosure could cause issuers to choose to limit their contact with bondholders and ultimately provide less information to the marketplace. Fortunately, the experience of the corporate market under Regulation FD shows that corporations have become more transparent in the wake of greater regulatory focus on selective disclosure rather than less. Academic studies have tracked an increase in the frequency of companies providing earnings forecasts and continuing to hold conference calls, on an open basis, that were previously closed.
The MSRB provides resources to facilitate timely and complete disclosure of material information to bondholders by issuers on its EMMA website. Among the free tools available on EMMA are an email reminder service for recurring financial disclosures, customized issuer homepages to collect and display all disclosures from an issuer in a single page, and a dedicated submission process for voluntary disclosure of information about bank loans and other debt.
The MSRB also offers direct assistance to state and local government issuers to advance their knowledge on disclosure best practices through in-person educational events, webinars and an online education center.
When it comes to municipal market disclosure, it’s better to be inclusive than selective.
The Bond Buyer
By Lynnette Kelly
Published September 13 2017, 9:50am EDT
Lynnette Kelly is executive director of the Municipal Securities Rulemaking Board.
Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today published a market advisory to increase awareness among issuers of the importance of disclosing material information fairly, equitably and in the public domain. The practice of “selective disclosure” creates an information imbalance that favors a limited group of bondholders, which may include analysts for investment banking firms, investment advisers or institutional investors, who are given access to material information that others do not have.
“Issuers of municipal securities and their financial professionals share a responsibility to protect the integrity of the municipal market by making full and fair disclosures to all investors,” said MSRB Executive Director Lynnette Kelly. “When selective disclosure occurs – often inadvertently – certain investors can be disadvantaged. The MSRB is a resource for issuers and their financial professionals seeking to implement practices to ensure that all investors and stakeholders have equal access to the same material information from the issuer in a timely manner.”
Question-and-answer sessions during investor conference calls and invitation-only meetings with analysts are common scenarios in which selective disclosure could arise, according to the MSRB advisory. “These types of events are not inherently problematic,” says Kelly. “However, issuers should make it a practice to consider whether material nonpublic information was shared in these circumstances and take steps to make that information public promptly after the event,” Kelly said.
Selective disclosure, while not unique to the municipal market, is specifically prohibited in the corporate market under Securities and Exchange Commission Regulation Fair Disclosure (FD). Municipal issuers are not subject to Regulation FD, but the MSRB’s advisory cautions about the potential for federal fraud liability if, for example, known material information is omitted from required public disclosures. Further, if an investor were to make a trade based on improperly disclosed material nonpublic information, that could constitute insider trading.
The MSRB joins other municipal market participants in drawing attention to the practice of selective disclosure, including the Securities and Exchange Commission’s Office of Municipal Securities, the National Federation of Municipal Analysts and the Government Finance Officers Association.
Read the MSRB’s market advisory.
Date: September 13, 2017
Contact: Jennifer A. Galloway
Chief Communications Officer
202-838-1500
jgalloway@msrb.org
On September 13, 2017, the Municipal Securities Rulemaking Board (the “MSRB”) published a market advisory on selective disclosure (the “Notice”). The stated purpose of the Notice is to “increase awareness” of selective disclosure as a “market fairness” concern. Although the Notice acknowledges that selective disclosure by issuers of, or conduit obligors on, municipal securities is not prohibited or “inherently problematic”, the Notice cautions issuers and obligors in the municipal market not to selectively disclose material nonpublic information.
The Notice’s bottom line is to urge that issuers of and obligors on municipal securities voluntarily disclose to the broader marketplace information that is potentially material and is being disclosed or has been disclosed to a subset of actual or potential bondholders “by a method or combination of methods that is reasonably designed to effect broad, non-exclusionary distribution of the information to the public”, including, for example, by posting the relevant information on the MSRB’s EMMA website.
The Notice addresses the practice of certain municipal securities issuers and obligors of making selective disclosure, which occurs when certain classes of investors (the Notice singles out investment bankers, investment advisers and institutional investors as “typical” recipients) are given access to information but other investors are not. Selective disclosure may occur when the issuer presents information relating to an issue to current or prospective investors, for example, during road shows, investor conferences and one-on-one investor calls or meetings. The Notice states that “these events are not inherently problematic, but they can become so when the information conveyed is nonpublic and material”.
The Notice addresses selective disclosure in both the primary and secondary markets. As an example, the MSRB notes that investor conferences and investor calls often include question-and-answer sessions, which may place the issuer at risk of discussing nonpublic material information, such as information that is not included in the preliminary official statement. As to secondary market selective disclosure, the MSRB uses the example of when an issuer might provide new nonpublic material information, which is not required to be disclosed pursuant to Rule 15c2-12 under the Securities Exchange Act of 1934 (“Exchange Act”) or any other rule, to select investors or analysts.
As an example from other markets, the Notice outlines some of the requirements of the Securities and Exchange Commission’s (SEC) Regulation Fair Disclosure, more commonly known as Regulation FD, adopted in 2000 to address, in part, selective disclosure by public companies. The regulation provides that, when an issuer discloses material nonpublic information to certain persons (e.g., brokers, dealers, investment advisers and investment companies), it must publicly disclose that information. If the selective disclosure was intentional, the issuer must make the public disclosure simultaneously; if it was unintentional, the issuer must make the public disclosure promptly.
The Notice acknowledges that Regulation FD does not apply to municipal issuers (or to obligors on municipal securities that are not public issuers of non-municipal securities), as municipal issuers are exempt from regulation by the SEC (other than antifraud provisions). Similarly, while the Exchange Act provides the MSRB with broad authority to write rules governing the activities of brokers, dealers, municipal securities dealers and municipal advisors, it does not provide the MSRB with authority to write rules governing the activities of issuers.
The Notice also acknowledges that selective disclosure, even of material nonpublic information, does not in and of itself constitute inside information for purposes of “insider trading” prohibitions, as such prohibitions generally have been construed as applicable only where the disclosure is made in breach of a duty to the issuer. However, the Notice appears to promote reducing selective disclosure by highlighting the risk that selective disclosure of nonpublic and material information might be indicative of material omissions or misstatements in offering documents or result in transactions that might be considered insider trading.
The Notice suggests that issuers and conduit obligors may wish to develop and follow guidelines for disclosure in a manner that disseminates all potentially material nonpublic information to all market participants. This is not unlike the push a few years ago by the Internal Revenue Service for issuers to establish post-issuance compliance guidelines. The Notice further suggests that issuers consider adopting, on a voluntary basis, the dissemination principles set forth in Regulation FD.
The MSRB claims that the purpose of the Notice “is not to discourage direct communications between issuers and investors and/or analysts, as road shows, investor conferences and other similar communications are legitimate market practices that are not inherently problematic.” Although the Notice is measured in tone and does not communicate any new legal requirements, it may prompt some issuers to decide that it is overly burdensome to sort through what good faith nonpublic communications might be deemed “unfair” selective disclosure, and to determine that their most efficient options are to err on the side of not entertaining calls or meetings involving individual analysts or investor groups or to post all nonpublic communications (presumably including transcripts of oral discussions) on EMMA. Although some issuers have adopted model standards to address these concerns; for some issuers, especially smaller issuers that are not in the market regularly, a policy of publicly posting everything that is said may well have a chilling effect on routine conversations between issuer representatives and investors. There also may be routine and follow-up conversations between issuer representatives and investor representatives that focus on details and monitoring of generally known items that an issuer may reasonably deem not to be material, and there is no reason to discourage such interactions.
It is to be hoped that the municipal market will continue to operate in a manner that acknowledges investor protection and market integrity and that continues to disclose material information to all without an overreaction that shuts down individualized discussions.
Mintz Levin
By Charles Carey
September 15, 2017
The Municipal Securities Rulemaking Board (MSRB) published an advisory on September 13 highlighting to municipal issuers, dealers and municipal advisors the importance of disclosing material information “fairly, equitably and in the public domain.” The MSRB is concerned that “selective disclosure” creates an information imbalance favoring a limited group of bondholders, such as investment banking firms, investment advisors or institutional investors, who are given access to material information that others do not have. Selective disclosure can occur:
The MSRB advises that issuers make it a practice to consider whether material nonpublic information has been shared and to take steps to ensure any such information is made available to the general public promptly.
Selective disclosure, while not unique to the municipal market, is specifically prohibited in the corporate market under Securities and Exchange Commission Regulation Fair Disclosure (FD). Municipal issuers are not subject to Regulation FD, but the MSRB’s advisory cautions about the potential for federal fraud liability if, for example, known material information is omitted from required public disclosures. Further, if an investor were to make a trade based on improperly disclosed material nonpublic information, that could constitute insider trading.
The MSRB stressed that along with issuers, dealers (acting as underwriters) and municipal advisors may incur liability for selective disclosure under anti-fraud provisions and MSRB Rule G-17, which requires that dealers and municipal advisors deal fairly with all persons and prohibits them from engaging in any deceptive, dishonest or unfair practice.
The MSRB noted that it is a common practice in the case of road shows and investor conferences for an attorney to review the oral script and distributed materials to be certain all the information is included in the disclosure documents available to the general market.
For your convenience, the advisory can be found here.
by Judith A. Blank, Namita Tripathi Shah, and Glenn G. Rybacki
September 14, 2017
Day Pitney
The Securities and Exchange Commission this month announced a significant enforcement action against an Oklahoma municipal advisor, Municipal Finance Services, Inc., and two officers of the firm, including its founder and president.
The action, announced on Aug. 24, offers helpful guidance for municipal advisors regarding the fiduciary duty of care. Prior municipal advisor enforcement has focused on disclosure to issuer clients of advisors’ conflicts of interest, an important duty of loyalty element. As a whole, these actions reflect the SEC’s constructive concerns for issuer protection pursuant to Dodd-Frank.
The SEC summarized: “Fiduciaries must act in the utmost good faith and use reasonable care to avoid misleading clients.” Issuers will benefit from advisor competence and affirmative provision of informed advice.
The MFSOK action also illustrates how advisors’ professional obligations to issuers can be expected to benefit investors when advisors assist issuers with disclosure. The SEC stated in its 1988 release proposing the Commission’s interpretation regarding underwriter investigatory responsibilities that financial advisors “hav[ing] access to issuer data and participat[ing] in drafting the disclosure documents” in competitive sales “will have a comparable obligation [to the investigatory responsibilities of underwriters] under the antifraud provisions to inquire into the completeness and accuracy of disclosure presented during the bidding process.”
Some advisors disagreed strongly, but the MFSOK action shows that the Commission is persisting, appropriately using the municipal advisors’ fiduciary duty as a vehicle. Since 1988, the SEC also has undertaken disclosure enforcement against financial advisors in negotiated offerings.
MSRB Rule G-42 was not in effect at the time of the MFSOK events beginning in 2011. So, the action is based on the statute. Nevertheless, several important Rule G-42 themes appear in the SEC’s release.
At the outset, it is important to consider MFSOK’s contracted scope of services with a City. The SEC’s release states that, pursuant to a 2011 agreement, MFSOK “was responsible for preparing the City’s official statements, … reviewing and commenting on all legal documents” related to bond issuance, and “assisting the City in complying with its continuing disclosure agreements.”
The City had entered into continuing disclosure agreements in 2005, 2008 and 2012 requiring audited financial statement filings within 180 days after fiscal year end. In accordance with SEC no-action guidance, the 2005 and 2008 CDAs could be amended only “with (1) bondholder consent; or (2) an opinion of bond counsel that the amendment would not materially impair the interests of bondholders.”
The amendment and bond counsel opinion were required to be filed with repositories. The 2012 CDA omitted amendment by bondholder consent, looking to bond counsel or paying agent determinations. Each CDA required filing of an event notice upon a modification of bondholder rights.
MFSOK assisted the City with competitive sales in 2012 and 2013. In 2013, MFSOK’s officers reviewed and commented on a CDA draft. The 2013 CDA, which was “prepared by bond counsel,” “purported to” amend the three prior CDAs to extend the City’s filing date to 360 days. The Commission concluded that the amendment was adverse to investors because it “had the effect of delaying significantly the date by which investors in the 2005, 2008 and 2012 bonds had access to the City’s annual reports.” The Commission observed that “some investors in the earlier bonds engaged in transactions without the benefit of the updated financial information … that had been promised … .”
MFSOK’s officers had never seen such an amendment and had concerns. Yet, they “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 City’s three prior CDAs.” The preparation of the 2013 amendment by bond counsel did not equate with the required bond counsel opinion.
Importantly, MFSOK’s officers did not communicate their concerns to the City. They “failed to advise their client of the prerequisites for amendments … and failed to ensure that their client was in compliance.” Instead, MFSOK “recommended” that the City sell the 2013 bonds to an underwriter in a competitive sale using an official statement that summarized the 2013 CDA. The City executed the 2013 amendment, “relying in part on MFSOK’s advice.”
Although MFSOK had begun in 2011 to assist the City “with the submission of annual reports on EMMA,” MFSOK did not advise the City until 2016 to file the 2013 CDA amendments, with the result that investors holding the prior bonds “were not informed of the new 360-day deadline” for three years.
All Respondents were ordered to cease and desist violations; MFSOK was censured; MFSOK was ordered to pay a $50,000 civil penalty; each of its two officers were ordered to pay $8,000 civil penalties; and MFSOK entered into undertakings to establish written policies and procedures and periodic training “regarding the fiduciary duty” and to appoint an official responsible for ensuring compliance with the policies and procedures and maintenance of records regarding training.
The MFSOK action provides significant food for thought for advisors. It applies the advisors’ fiduciary duty of care strictly, but fairly, requiring due care in the provision of advice, the provision of informed advice, and the conduct of due diligence as a basis for recommendations to issuers. MFSOK’s investigatory responsibilities to assist the City in making disclosure provides important investor protections.
Of course, every action depends upon specific circumstances. Advisors’ responsibilities to issuers depend upon contractual scopes of services. Still, the MFSOK action provides an excellent template. One may expect that, as future actions apply MSRB Rule G-42, with its granular elaboration of advisors’ duties, issuers, investors and the market as a whole will benefit from substantially increased professionalism.
The Bond Buyer
By Robert Doty
Published August 30 2017, 12∶56pm EDT
The Municipal Securities Rulemaking Board (MSRB) today filed with the Securities and Exchange Commission (SEC) proposed amendments to MSRB Rule G-34, on obtaining CUSIP numbers, which aim to clarify existing requirements and improve market consistency. If approved, the rule would codify the MSRB’s longstanding interpretation that municipal securities dealers are required to obtain CUSIP numbers for new issue securities sold in private placement transactions, including direct purchases. Additionally, if approved, non-dealer municipal advisors advising on competitive offerings would be required, like dealer municipal advisors under the current rule, to apply for CUSIP numbers.
The proposed amendments take into consideration feedback received from the industry and public in response to two requests for comment in March 2017 and June 2017. The MSRB’s proposal includes a principles-based exception from the requirement to obtain CUSIP numbers for direct purchases of municipal securities by banks – as well as their non-dealer control affiliates – that are intended to be held to maturity.
The SEC will publish the MSRB’s proposal in the Federal Register and invite additional public comment. The MSRB reviews and responds to these comments as part of its participatory rulemaking process.
Financial firms will take advantage of the long Labor Day weekend to update their systems for Tuesday’s start of the T+2 settlement cycle, which will require transactions to be settled two days instead of three days after a trade is executed. “The project is changing the market structure that touches every market participant whether they are buy side, sell side, service providers, utilities, big firms, small firms or custodians,” says Tom Price, a managing director at SIFMA.
Learn more at SIFMA’s Shortened Settlement Cycle Resource Center.
In support of the industry-wide effort to shorten the settlement cycle for all securities transactions, the Municipal Securities Rulemaking Board (MSRB) amended its rules to define regular-way settlement for municipal securities transactions as occurring on a two-day settlement cycle (“T+2”). The MSRB is reminding municipal securities dealers that these amendments will become effective September 5, 2017, which corresponds with the broader industry transition to T+2. The MSRB began its early support of this industry initiative by proposing amendments to its uniform practice rules, MSRB Rules G-12 and G-15, in March 2016.
Read the regulatory notice announcing the transition date.
View the order granting approval of the MSRB’s rule amendments.
Work continues on the GASB’s project reexamining the financial reporting model. In the last update, I told you about all the outreach we’d conducted following the issuance of the Board’s first document for public comment, the Invitation to Comment (ITC), Financial Reporting Model Improvements—Governmental Funds.
The ITC focused on the following issues:
Now, the GASB staff is analyzing the stakeholder feedback we received through over 100 comment letters and almost 100 participants in public hearings and user forums. Once that analysis has been completed and the information is synthesized for review, it will be presented to the members of the Financial Reporting Model Reexamination Task Force and discussed at a task force meeting in September. Beginning in October, the Board will redeliberate issues raised in the ITC with the benefit of stakeholder input, including task force feedback.
The results of these redeliberations will be presented in a second document for public comment, a Preliminary Views, that also will address a number of additional issues. These issues are expected to include:
If you have ideas about other ways you or other stakeholders might be interested in learning about the work the Board is doing to improve the financial reporting model, we’d love to hear from you!
The GASB currently is deliberating a project that reexamines the idea that the cost of borrowing during a construction period should be included in the cost of the capital asset.
The project is taking another look at the accounting and financial reporting requirements for capitalization of interest cost, with the goal of enhancing the relevance of capital asset information and potentially simplifying related reporting. The Board is reviewing the current guidance in light of the definitions of financial statement elements established in the GASB’s conceptual framework.
A key question the Board is exploring is whether interest cost is a period expense relative to borrowing or is a necessary cost of the capital asset. Based primarily on the GASB’s definition of an asset, the Board has tentatively decided to propose eliminating the requirement to capitalize interest cost. This proposal, if adopted after due process, would be adopted on a prospective basis.
What’s next: After the conclusion of project deliberations over the summer and fall months, the Board is expected to vote on an Exposure Draft before the end of the year.
More information about the Capitalization of Interest Cost project.
NEW YORK, Aug 23 (Reuters) – Municipal bond issuers should have to report their direct bank loans separately from other kinds of debt on their financial statements, according to the head of the group that sets disclosure standards for U.S. state and local governments.
That requirement would help “separate those disclosures and give the reader a perspective,” David Vaudt, chairman of the Governmental Accounting Standards Board (GASB), told Reuters in an interview on Wednesday.
GASB in June proposed changes to the way states and cities report direct loans and private bond placements. By reporting such information separately in financial notes, readers can more easily identify and evaluate the controversial forms of borrowing that can pose risks to bondholders and credit ratings.
Investors in the $3.8 trillion municipal bond market have become increasingly concerned as the use of direct loans and private bond placements has grown in recent years.
Such direct debt is not always disclosed. When it is, the terms can be cumbersome for investors and taxpayers to discover.
Direct debt could also contain terms that potentially put a bank at the front of the line for repayment, ahead of bondholders.
Issuers use direct debt because the loans can be faster to accomplish than traditional public bond offerings, which usually require long, costly bond documents laden with financial disclosures. Sometimes, direct debt provides cheaper financing and fast liquidity.
But if a state or city violates the terms of a direct loan, it is easier for a single entity, like a bank, to call the loan or pursue some other remedy, Vaudt said.
“It’s much more difficult to go to all the bondholders and get some type of action taken,” he said.
The state of Arkansas disputed the idea that direct debt should be separated from public bond offerings on financial statements.
“Some may argue that direct placement bonds may have different terms but this could be true of any debt, regardless of the means by which the debt was incurred,” the state wrote in comments about the suggested rules. “The means of incurring debt does not alter the basic construction of the obligation.”
The deadline for comments is Sept. 15.
Reuters
by Hilary Russ
(Reporting by Hilary Russ in New York; Editing by Meredith Mazzilli)
The Securities and Exchange Commission today announced that a municipal financing authority in Beaumont, California, and its then-executive director have agreed to settle charges that they made false statements about prior compliance with continuing disclosure obligations in five bond offerings.
Also settling charges are the underwriting firm behind those offerings and its co-founder for failing to conduct reasonable due diligence on the continuing disclosure representations.
The SEC’s Enforcement Division uncovered the violations as part of a review of municipal issuers and underwriters that did not voluntarily self-report under the agency’s Municipalities Continuing Disclosure Cooperation (MCDC) Initiative. The Beaumont Financing Authority and the underwriter, O’Connor & Company Securities Inc., would have been eligible for more lenient remedies had they self-reported during the MCDC Initiative.
According to the SEC’s order, the Beaumont Financing Authority had issued approximately $260 million in municipal bonds in 24 separate offerings from 2003 to 2013 for the development of public infrastructure. For each of those offerings, a community facilities district established by Beaumont agreed to provide investors with annual continuing disclosures, including important financial information and operating data. From at least 2004 to April 2013, the district regularly failed to provide investors with the promised information. The Beaumont Financing Authority failed to disclose this poor record of compliance when it conducted the 2012 and 2013 offerings totaling more than $32 million. As a result, the bonds appeared more attractive and investors were misled about the likelihood that the district would comply with its continuing disclosure obligations in the future.
“Investors in municipal bonds depend on timely and complete continuing disclosure from municipal issuers,” said LeeAnn Ghazil Gaunt, Chief of the SEC Enforcement Division’s Public Finance Abuse Unit. “Issuers and underwriters will continue to be held accountable when they fail to provide investors with an accurate picture of past compliance with continuing disclosure obligations.”
In a complaint filed in the Eastern Division of the U.S. District Court for the Central District of California, the SEC charged Beaumont’s then-city manager Alan Kapanicas, who also served as the Beaumont Financing Authority’s executive director. According to the complaint, he approved and signed the misleading offering documents. Kapanicas agreed to settle the charges without admitting or denying the allegations, and pay a $37,500 penalty. He also agreed to be barred from participating in any future municipal bond offerings.
In consenting to an SEC order without admitting or denying the findings, the Beaumont Financing Authority agreed to retain an independent consultant to review its policies and procedures. It also is required to establish appropriate and comprehensive policies, procedures, and training for employees as well as designate a compliance officer in order to ensure compliance with continuing disclosure agreements.
O’Connor & Company Securities Inc. and its co-founder and former primary investment banker Anthony Wetherbee agreed to settle the charges against them without admitting or denying the SEC’s findings. O’Connor & Company Securities Inc. will pay a $150,000 penalty and retain an independent compliance consultant to review its policies and procedures. Wetherbee will pay a $15,000 penalty and serve a suspension from the securities industry for six months.
The SEC’s investigation was conducted by Steven Varholik and Jason H. Lee of the Public Finance Abuse Unit with assistance from Deputy Chief Mark R. Zehner, Jonathan Wilcox, and Creighton L. Papier. The investigation was supervised by Monique C. Winkler.
Aug. 23, 2017
The Commission filed actions against investment advisers or their associates this week involving: compliance issues tied to political intelligence regarding government agencies like CMS; another centered on the payment of excessive fees; and a third involving unauthorized transactions.
Municipal securities were also a focus this week. A series of actions were filed centered on the failure to comply with continuous disclosure obligations. Those obligations typically require the issuer to periodically update the financial information on bonds sold to the public.
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Breach of duty: In the Matter of Municipal Finance Services, Inc., Adm. Proc. File No. 3-18139 (August 24, 2017) is a proceeding which names as Respondents the firm, a registered municipal advisor, Rick Smith, the founder of the firm, and Jon Wolff, a vice president at the firm. The firm was an adviser to the City under a written agreement. Essentially, it advised the City on offerings. In May 2013 the City issued certain bonds that included a continuing disclosure agreement. At the time the City had three outstanding bond issues, each of which also had continuous disclosure agreements. The 2013 agreement amended the disclosure obligations for the prior offerings by extending the time in which to furnish the financial information by one year and in other ways that were inconsistent with the previously issued bonds. Respondents failed to advise the City about these points and did not submit the agreements to EMMA for three years. The Order alleges violations of Exchange Act Section 15B(c)(1). To resolve the proceeding the firm will implement an undertaking which includes an obligation to adopt appropriate polices and procedures. In addition, each Respondent consented to the entry of a cease and desist order based on the Section cited in the Order. The firm was censured and will pay a penalty of $50,000. Each of the individual defendants agreed to pay a penalty of $8,000.
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Municipal securities/disclosure: SEC v. Kapanicas, Civil Action No. 5:17-cv-01704 (C.D. Cal. Filed August 23, 2017) is an action against Alan Kapanicas, the former executive director of the Beaumont Financing Authority which issued about $260 million in municipal bonds in 24 separate offerings from 2003 through 2013. For each offering the City of Beaumont, California agreed to provide investors with annual continuing disclosures. From at least 2004 through April 2013 the City failed to comply with this obligation. In offerings in 2012 and 2013 the City failed to disclose its poor financial condition. This made the bonds appear more attractive, misleading investors. The complaint alleged violations of Securities Act Sections 17(a)(2) and (3). Mr. Kapanicas resolved the action, consenting to the entry of a permanent injunction based on the Sections cited in the complaint. He also agreed to pay a penalty of $37,000. See Lit. Rel. No. 23920 (Aug. 24, 2017); see also In the Matter of Beaumont Financing Authority, Adm. Proc. File No. 3-18132 (August 23, 2017)(related action against the Financing Authority based on essentially the same facts; resolved with a series of undertakings and a cease and desist order based on Securities Act Sections 17(a)(2) and (3)); In the Matter of O’Connor & Company Securities, Inc., Adm. Proc. File No. 3-1131 (August 23 2017)(action based on same facts as above naming underwriter and a registered representative at the firm, Michael Wetherbee as Respondents; resolved with a cease and desist order based on Securities Act Sections 17(a)(2) and (3) and Exchange Act Section 15B(c)(1) and a censure of the firm which will pay a penalty of $150,000; Mr. Wetherbee is suspended from the securities industry, from serving in an supervisory capacity and from participating in a penny stock offering for six months; he will pay a penalty of $15,000).
by Thomas Gorman
August 25, 2017
Dorsey & Whitney LLP
PHOENIX – The Municipal Securities Rulemaking Board is seeking comment on a draft plan to refine the data it collects regarding the investment options offered in 529 college savings plans and Stephen Beck, Jr., Achieving a Better Life Experience Act of 2014 (ABLE) programs.
Both 529 plans and ABLE programs, the latter of which creates tax-advantaged savings accounts for individuals with disabilities and their families, are municipal fund securities. The MSRB regulates dealers that underwrite or sell interests in 529 plans and ABLE accounts. The MSRB first began collecting data about 529 plans in 2015 and will begin collecting data about ABLE programs in 2018 on a Form G-45 under Rule G-45 on reporting of information on municipal fund securities.
The data the MSRB collects, which is not publicly available, can be difficult to decipher under current reporting rules because different plans have different practices.
MSRB executive director Lynnette Kelly said in a release that the board is trying to be able to more accurately monitor these programs and spot potential risks and wrongful conduct.
“Essentially, our goal is to be able to more precisely compare apples to apples,” Kelly said. “Fine-tuning the data we collect will allow the MSRB to make more accurate comparisons across 529 plans and ABLE programs, enhancing our ability to understand and monitor the market.”
There are four main data points the MSRB is looking to either refine its collection of, or get more information from dealers about: program management fees, benchmark return percentages, performance by asset class, and investment option closing dates.
Form G-45 requires that underwriters report the amount of the program management fee assessed by the 529 plan. This fee is usually separately identifiable, but for some 529 plans this isn’t the case. Instead, the program management fee is sometimes included in total fund operating expenses assessed by the underlying mutual fund in which the investment option exists. The MSRB is proposing to require dealers to report the program management fee separately on Form G-45.
Dealers are required to report the benchmark return percentage for each investment option offered by a 529 plan for specified periods. The MSRB has found that some investment options use custom or “blended” benchmarks for their performance, making it difficult to make apples-to-apples comparisons across plans. The MSRB is therefore proposing to require an underwriter to a 529 plan or an ABLE account to identify and provide annually the weighted value of each index that make up the benchmark.
G-45 requires that an underwriter report the asset classes in each investment option as of the most recent semi-annual period, but there is no mandate that they provide information about how the asset classes within an investment option are performing. The MSRB is proposing to collect that information to show how a particular asset class is performing on an annual basis.
In addition, sometimes an investment option offered in a 529 plan may be closed to new investors but allow current account owners to continue to invest in it even though it is “closed.” A 529 plan may also close an investment option completely. In either case, the investment option data submitted for that investment option on Form G-45 doesn’t differentiate between the two and can be contrary to analytical expectations, so that the MSRB isn’t able to easily understand why. To clarify that, the board is proposing to require an underwriter to a 529 plan or an ABLE program to provide information during each semi-annual reporting period about whether an investment option was closed to new investors or closed completely.
Comments on the draft changes to Form G-45 are due by Sept. 21.
The Bond Buyer
By Kyle Glazier
08/23/17
PHOENIX – The Beaumont, Calif. Financing Authority, its former executive director, underwriter O’Connor & Company Securities Inc., and its co-founder have been charged by the Securities and Exchange Commission over false statements made about prior compliance with continuing disclosure obligations in five bond offerings.
All four entities agreed to settle the charges against them without admitting or denying the commission’s findings.
This is the commission’s first post-Municipalities Continuing Disclosure Cooperation initiative disclosure enforcement action.
The SEC said the parties would have been eligible for more lenient enforcement treatment under MCDC had they voluntarily reported the conduct under that program. But they did not so.
“Investors in municipal bonds depend on timely and complete continuing disclosure from municipal issuers,” said LeeAnn Ghazil Gaunt, chief of the SEC enforcement division’s public finance abuse unit. “Issuers and underwriters will continue to be held accountable when they fail to provide investors with an accurate picture of past compliance with continuing disclosure obligations.”
The charges stem from bond issuances in 2012 and 2013. According to the SEC, BFA, located in Riverside County, had issued approximately $260 million in bonds in 24 separate offerings from 2003 to 2013 to help finance the development of infrastructure. For those offerings, City of Beaumont Community Facilities District No. 93-1, a community facilities district established by Beaumont that agreed to provide investors with continuing disclosures, including annual financial information and operating data. From at least 2004 to April 2013, the district regularly failed to provide investors with information in accordance with its continuing disclosure agreement.
“The Beaumont Financing Authority failed to disclose this poor record of compliance when it conducted the 2012 and 2013 offerings totaling more than $32 million,” the SEC said. “As a result, the bonds appeared more attractive and investors were misled about the likelihood that the district would comply with its continuing disclosure obligations in the future.”
The SEC charged BFA with negligence in committing securities fraud. BFA agreed to cease and desist from future securities law violations and to retain an independent consultant to review its policies and procedures. It also agreed to establish appropriate and comprehensive policies, procedures, and training for employees as well as designate a compliance officer in order to ensure compliance with continuing disclosure agreements.
Alan Kapanicas, 65, Beaumont’s former city manager who also had been former executive director of BFA, agreed to pay a $37,500 penalty and be barred from participation in any future municipal bond offerings. The SEC said he “failed to exercise reasonable care” and “repeatedly either failed to read and understand the district’s continuing disclosure agreements or disregarded their requirements.” He was also charged with negligence in committing securities fraud.
O’Connor & Company Securities. based in Costa Mesa, Calif., agreed to pay a $150,000 penalty, for violating securities fraud laws and Municipal Securities Rulemaking Board Rules G-17 on fair dealing and G-27 on supervision. It agreed to retain an independent consultant to conduct a review of its policies and procedures as they relate to the investigation of the truthfulness and completeness of key representations contained in municipal securities offering documents.
Under the MCDC, underwriter penalties were set at $20,000 for each offering of $30 million or less containing materially false statements about continuing disclosures. Had it participated in the MCDC, O’Connor & Company could have shaved $50,000 off its penalty.
Anthony Wetherbee, 71, the firm’s co-founder and former primary investment banker, will pay a $15,000 penalty and be suspended from the securities industry for six months. He was also charged with negligence in committing securities fraud and violating the MSRB’s fair dealing rule.
“Wetherbee, and through his actions, OCSI, failed to conduct adequate due diligence and, as a result, failed to form a reasonable basis for believing in the truthfulness of BFA’s assertions that the district had complied with its prior CDAs contained in the BFA’s 201 and 2013 official statements.” the SEC said. Neither the banker nor his firm ever checked the MSRB’s EMMA system to determine if the assertions were truthful and complete, the commission said.
Neither Beaumont nor O’Connor & Company could be reached for comment.
The conduct alleged by the SEC in this case is precisely what the MCDC was designed to bring attention to. Rolled out in spring 2014, the initiative promised underwriters and issuers would receive lenient settlement terms if they self-reported instances over the previous five years where issuers falsely said in offering documents that they were in compliance with their continuing disclosure agreements. In total, the initiative led to settlements with 72 issuers from 45 states and 72 underwriters representing 96% of the underwriting market. In December, the SEC announced it was finished with MCDC settlements and would turn its attentions to violators who did not report, whom the SEC considered to be at high risk for future violations.
The Bond Buyer
By Kyle Glazier
08/23/17
On August 22nd, Bond Dealers of America submitted a letter to the Treasury Department regarding its upcoming report on U.S. Capital Markets Regulation, which is due out in the fall of 2017. The letter is here for your review. Treasury staff specifically requested BDA’s input on regulations, enforcement, and market liquidity.
BDA’s letter focuses on the following issues:
The letter’s sections are designed to provide Treasury Staff with a brief synopsis of the significant issues BDA member firms are confronting. If Treasury Staff requests additional information, BDA will engage member firms and deliver answers.
Treasury Report Series on Banking, Securities, and Capital Markets Regulation
In response to Executive Order 13772 (Core Principles for Regulating the U.S. Financial System), issued by President Trump on February 3, 2017, the U.S. Treasury will issue a series of reports on the U.S. financial regulatory system. The first report focused on the regulatory system for U.S. banks and credit unions. That report can be accessed here.
The second report, focused on U.S. capital markets regulation will be published in the fall of 2017
Implications of the Report
Norwalk, C T— August 22, 2017 — The Board of Trustees of the Financial Accounting Foundation today approved a report, Three-Year Review of GASB Scope of Authority: Consultation Process Policy, that leaves unchanged the Governmental Accounting Standards Board’s (GASB) scope of authority policy.
That policy outlined a pre-agenda consultation process for the GASB and the FAF’s Standard-Setting Process Oversight Committee to follow in determining whether information the GASB might consider for standard-setting activity is “financial accounting and reporting information” within the scope of the GASB’s standard-setting mission. The November 2013 FAF report that introduced the policy and the related consultation process called for the FAF to review the effectiveness of the consultation process three years after implementation.
“I’m very pleased that the Trustees have affirmed the effectiveness of the consultation process, which strikes the right balance by maintaining the independence of the GASB, while ensuring appropriate oversight by the Trustees,” said FAF Chairman Charles H. Noski. “We would like to express our thanks to the stakeholders who shared their thinking with us and helped us reach our conclusions.”
The Trustees also agreed to review the policy again within five years.
Additional information is available on the GASB Scope of Authority page on the FAF website.
Washington, DC – To support its oversight responsibilities, the Municipal Securities Rulemaking Board (MSRB) is seeking comment on a draft plan to refine data elements the MSRB collects relating to the investment options offered in 529 college savings plans and Stephen Beck, Jr., Achieving a Better Life Experience Act of 2014 (ABLE) programs.
The MSRB aims to clarify data it collects from dealers acting as underwriters to 529 plans and data it will collect from dealers acting as underwriters to ABLE programs, and collect additional information on investment plan options.
“Essentially, our goal is to be able to more precisely compare apples to apples,” said MSRB Executive Director Lynnette Kelly. “Fine-tuning the data we collect will allow the MSRB to make more accurate comparisons across 529 plans and ABLE programs, enhancing our ability to understand and monitor the market.”
These investment vehicles are municipal fund securities. The MSRB regulates dealers that are underwriters to and dealers that sell interests in 529 plans and ABLE programs. The MSRB first began collecting data about 529 plans in 2015 and will begin collecting data about ABLE programs in 2018. Data collected on MSRB Form G-45 allows the MSRB and other regulators that are charged by statute with examining dealers to analyze and compare 529 plans and ABLE programs and monitor the market for potential risks and wrongful conduct. The data as collected by the MSRB currently is not available to the public.
Comments on the MSRB’s draft changes to Form G-45 should be submitted no later than September 21, 2017. Read the request for comment.
Date: August 22, 2017
Contact: Jennifer A. Galloway
202-838-1500
jgalloway@msrb.org
Washington, DC – The Municipal Securities Rulemaking Board (MSRB) received approval from the Securities and Exchange Commission (SEC) on Friday, August 18, 2017 to amend MSRB Rule G-21(e), on municipal fund security product advertisements by municipal securities dealers. The amendments will be effective on November 18, 2017. Read the approval notice.
“These changes ensure investors are alerted to the potential risks of investing in particular investment options of municipal fund securities,” said MSRB Executive Director Lynnette Kelly.
The approved amendments reflect changes to SEC rules governing money market fund advertisements and improve regulatory consistency of disclosure requirements for those municipal fund securities that invest in money market funds.
The approved amendments limited to Rule G-21(e) were originally introduced as part of a broader request for comment on updating and harmonizing certain provisions of the MSRB’s municipal securities dealer advertising rule and establishing similar advertising regulations for municipal advisors. The MSRB continues to consider the comments received on the other aspects of its broader proposal.
Date: August 21, 2017
Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org
The SEC announced that a municipal financing authority in Beaumont, California, and its then-executive director, have agreed to settle charges that they made false statements about prior compliance with continuing disclosure obligations in five bond offerings. The underwriting firm behind those offerings and its co-founder settled charges for failing to conduct reasonable due diligence on the continuing disclosure representations.
The SEC press release, with links to the SEC orders and complaint, is available here.
Municipal bonds historically have been an investment that lets you sleep easy. Their low-risk reputation has been tested in the last decade by some high-profile bankruptcies, with Puerto Rico and Detroit’s being the most prominent. But in recent years, big banks have been scooping up more state and local debt than ever before. Now Congress is pushing to make the sector more even attractive to banks. The magic charm would be qualifying certain municipal bonds as High-Quality Liquid Assets, or HQLA. The question is whether that label might get slapped on bonds that are certainly high quality, but may not be really, truly liquid.
1. What’s so desirable about being HQLA?
In the aftermath of the 2008 financial crisis, regulators wanted to make sure that banks didn’t run out of money in the next credit crunch. They began requiring them to calculate what’s called a liquidity coverage ratio (LCR) to test whether they hold enough cash and easy-to-sell assets to weather a short-term liquidity shock, when borrowing might be hard and buyers might disappear for less-than-sterling assets. The most valuable assets in this calculation are ones that can be sold quickly and without discount — High-Quality Liquid Assets.
2. What is Congress trying to do?
Regulators currently have left municipals out in the cold as far as HQLA is concerned, worried that too many municipal securities would be hard to sell in a hurry. Now, the House and Senate are moving to allow banks to treat certain municipal bonds as High-Quality Liquid Assets when calculating their liquidity ratio. The House Financial Services Committee unanimously approved a bill that would treat qualifying municipal bonds as high-quality liquid assets. The original form of the bill labeled them Level 2A assets in the existing regulatory framework, though an amendment changed that to 2B. The Senate has its own version of the bill which has secured largely bipartisan support, though it’s at a standstill right now as their legislative calendar is inundated with other priorities, such as tax reform.
3. What’s the difference between Level 2A and Level 2B?
Assets designated as Level 2B are treated more conservatively than those labeled Level 2A as they are considered to be more of a credit risk, and therefore less high quality, and not as liquid. In calculating their liquidity ratio, banks are required to impose a larger haircut, or discount, and 2B assets can only constitute 15 percent of total HQLA holdings. The haircut level for Level 2B assets ranges from 25 to 50 percent; no specific haircut percent has been proposed for municipal bonds so far.
4. Will Congress end up passing this?
Most likely, yes — even if not this year, with Congress “up to its eyeballs” in other business, says Philip Fischer, who heads up municipal research for Bank of America Merrill Lynch. After all, you’ll be hard-pressed to find a legislator that doesn’t want to make municipal debt, a key financing tool used in their own jurisdictions, more attractive. It’ll get states and counties better rates and may marginally increase demand in the short-term.
5. Are banking regulators on board?
They’ve been divided on the HQLA question since 2016, when the Federal Reserve said it would allow HQLA treatment of state and municipal bonds that “meet the same liquidity criteria that currently apply to corporate debt securities.” The other two major financial regulating agencies, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, haven’t taken that step. The disagreement among agencies leaves banks in an awkward position, Fischer said. Neither the OCC or the FDIC have issued a statement in support of or against this latest bill.
6. Are munis really high-quality liquid assets?
That depends on whom you ask. The vast majority of municipals are certainly high quality, given the taxing power of the government agencies that issue them, but it’s also an extremely fragmented market that negatively affects just how liquid each issue may be at any given moment. They lack a dedicated exchange, so pricing can be disjointed, says Jeffrey Lipton, head of municipal research at Oppenheimer & Co. These peculiarities will require regulators to look beyond a rating to assess the trade volume and outstanding float of each specific bond before granting it HQLA status, he said. While this all will make the narrative more complicated, it shouldn’t disqualify the sector from the race.
7. Why does this matter?
If municipal bonds gain regulatory par with certain corporate debt issues, they figure to become an even more popular part of a bank’s portfolio. As of March 31, U.S. banks held a record $554 billion, or about 14.5 percent, of all outstanding municipal debt. Thanks goes in large part to President Barack Obama for this boom in bank municipal holdings. He signed a stimulus package in 2009 that gave banks enhanced tax incentives to purchase municipals. Granting certain municipals HQLA status now will likely see banks demand for municipals increase further. This would spark higher prices (and lower yields) for state and local debt. For President Donald Trump, a stronger market for municipal bonds might mean a better chance for his plan for $1 trillion in proposed infrastructure spending to come to fruition.
Bloomberg Markets
By Kristy Westgard
August 21, 2017, 2:00 AM PDT
The Dallas Morning News has been digging into an unusual bond deal being used to help underwrite the Statler Hotel redevelopment in downtown Dallas, a massive improvement project that includes a building the News will soon call home.
At issue: The sale in 2016 of $26.5 million in municipal bonds backed by future tax incentives that the city of Dallas granted to the developer.
DMN reporters Miles Moffeit and Terry Langford have unearthed that officials with the Securities and Exchange Commission are questioning “at least four people involved in the $230 million renovation of the historic hotel and adjoining former library.”
From the Dallas Morning News:
One focus of the SEC inquiry is the sale last year of $26.5 million in municipal bonds backed by future tax incentives that the city of Dallas granted to the developer under what’s called tax-increment financing. Cities use such deals to lure developers to build in specific areas with little economic growth.
Under these programs, any increases in property-tax collections in these zones are rebated to developers over time and up to a certain limit — $46.5 million in the case of the Statler project.
Rather than wait to collect these tax payments over decades, Centurion decided to raise money immediately by selling bonds that in the future would be paid off by the tax rebates.
The IRS ruled last month that the bonds do not qualify for the tax exemption that investors were promised. The agency did not explain its reasoning, but Mike Culler, a public-finance tax lawyer for Squire Patton Boggs, said the deal probably failed to show a benefit to the public.
The Wisconsin agency that was behind the bond sale said it has appealed the IRS decision.
This hasn’t been the first time that the News has put a spotlight on the project.
The Statler Hotel redevelopment budget, which has risen 50 percent over the past three years, is built on several government programs and hefty tax incentives, according to the Dallas paper.
And earlier this year, Moffeit and Langford reported on the IRS probing aspects of the project’s financing.
The new complex will include boutique shopping, fine dining, business offices, and hotel rooms, according to the Statler Hotel website. The Dallas Morning News will rent the old library building, which is part of the development as well as a national historic site.
The Texas Monitor
By Trent Seibert – August 18, 2017
Proposed Rule Change Relating to Capital Acquisition Broker Rules 203 (Engaging in Distribution and Solicitation Activities with Government Entities) and 458 (Books and Records Requirements for Government Distribution and Solicitation Activities)
Financial Industry Regulatory Authority, Inc. (“FINRA”) is filing with the Securities and Exchange Commission (“SEC” or “Commission”) a proposed rule change to adopt Capital Acquisition Broker Rules 203 (Engaging in Distribution and Solicitation Activities with Government Entities) and 458 (Books and Records Requirements for Government Distribution and Solicitation Activities) that would apply established “pay-to-play” and related rules to the activities of member firms that have elected to be governed by the Capital Acquisition Broker (“CAB”) Rules and that engage in distribution or solicitation activities for compensation with government entities on behalf of investment advisers.
On August 7, 2017, in response to a Request for Information published by the Department of Labor, the BDA submitted a comment letter to the DOL focused on how it should amend the Fiduciary Duty Rule and the Principal Trading and Best Interest Contract Exemption.
BDA Comment Letter Summary — Primary Areas of Focus
Recently, the BDA submitted a comment letter focused on whether the Department of Labor should delay the January 1, 2018 Best Interest Contract Exemption and Principal Trading Exemption applicability date. The letter is here.
Additional Documents
DOL Enforcement Guidance is here.
Morgan Lewis Memo on Requirements of the Rule as of June 9th is here.
Bond Dealers of America
August 8, 2017
Has proposed pushing the Jan. 1, 2018, compliance date to July 1, 2019
The Labor Department is proposing to delay the fiduciary rule’s compliance deadline by 18 months, a move that experts say suggests the retirement-savings rule will emerge from a re-evaluation with significant revisions.
The agency, which has been reassessing the Obama-era rule’s economic impact, said Wednesday in a court document that it submitted a proposal to push the Jan. 1, 2018, compliance date to July 1, 2019. The document, filed as part of a lawsuit in the U.S. District Court for the District of Minnesota, also says the Labor Department is considering loosening restrictions on the types of transactions that are prohibited under the rule, including insurance products and rollovers of individual retirement accounts.
The fiduciary rule “is likely here to stay, but its impact could be significantly reduced over the next few years if exemptions from the rule are significantly expanded,” said Jamie Hopkins, a professor at the American College of Financial Services.
The Labor Department couldn’t immediately comment.
The first phase of the rule, requiring financial-advice providers to act in retirement savers’ best interest, took effect June 9. The request for a delay would give agency officials more time to conduct their economic-impact review and give industry players more time to weigh in. Last month, the Labor Department issued a request for information, writing that it “is interested in the possibility of regulatory changes that could alter or eliminate contractual…requirements,” among other potential changes.
In Wednesday’s filing, Labor Secretary Alexander Acosta said the agency had also proposed changes to how certain transactions are treated under the rule. Transactions such as IRA rollovers and insurance products including annuities could become exempt under the final rule, the document suggests.
“There is a lot on the table here,” considering the questions the Trump administration has raised about the impact of the rule’s compliance costs and legal liabilities, said Erin Sweeney, an attorney at Miller & Chevalier Chartered who represents parties in litigation regarding fiduciary obligations.
Ms. Sweeney said the delay would give the financial-services industry more time to comply with the regulation, while at the same time preventing firms from “starting down a compliance path only to do a zig-zag” if the rule is revised.
For retirement savers, the delay doesn’t change the requirement that financial advisers put clients’ interests before their own. It does, however, make it the best-interest standard harder to enforce. The rule as written by the Obama administration included a provision that would allow investors to bring class-action suits against advisers they say violated their fiduciary duty. While such suits don’t typically yield big paydays for individual investors, the potential cost to advisers and firms was meant to prevent violation of the rule.
“Until you have a contract, it’s hard to imagine a situation where a lawyer brings a case,” Ms. Sweeney said.
Some financial-industry executives cheered the delay proposal. “I think that everyone was hoping for a delay,” said Ronald Kruszewski, chief executive at Stifel Financial Corp. “It’s encouraging that the DOL is taking a look at both protecting consumers and protecting choice.”
Investor watchdogs, meanwhile, expressed concern. “Retirement savers need and deserve a fully enforceable best interest standard backed by real restrictions on conflicts,” said Barbara Roper, director of investor protection at the Consumer Federation of America. “The biggest impediment to investors receiving the full benefits of the rule is uncertainty over its fate, and a delay of this length only contributes to that uncertainty.”
The delay notification stems from a lawsuit brought by Thrivent Financial for Lutherans against the Labor Department. The organization has challenged the department’s authority surrounding the rule and approach to how clients can bring cases against financial advisers they say violated their fiduciary duty. The case is one of several that has been levied against the department.
Expected to publish Thursday, the delay proposal was submitted to the Office of Management and Budget, the gatekeeper for revisions and delays to U.S. regulations.
The Wall Street Journal
By Lisa Beilfuss
Updated Aug. 9, 2017 5:23 p.m. ET
Write to Lisa Beilfuss at lisa.beilfuss@wsj.com
PHOENIX – Market participants are a bit mystified about what the Municipal Securities Rulemaking Board could be looking for in its upcoming concept release on primary offering practices, although some groups are working to update their own guidelines.
Issuers, dealers, and municipal advisors all told The Bond Buyer that they are unaware of any pressing problems or uncertainties in primary offering practices or MSRB rules governing primary offerings.
The board announced last month that it plans to put out a lengthy concept release sometime in the next couple of months that will seek market input on numerous aspects of primary offering practices. Concept releases are the generally the precursor to proposed new rules or rule changes. But unlike the federally-mandated municipal advisor rulemaking the board has spent much of its time on during the last several years, the genesis of this effort is more difficult to pin down.
“They’ve been talking about this for a little bit,” said John Vahey, managing director of federal policy for Bond Dealers of America. Vahey noted that the MSRB has now moved through the rulemaking mandated by the Dodd-Frank Act, which included setting up a new regulatory regime for muni advisors, and is now taking a look at its other rules. The MSRB has multiple rules that touch on primary offering practices including Rule G-11, on primary offering practices and Rule G-32, on disclosures in connection with primary offerings, as well as rules on the collection of certain data.
“We don’t yet know what this concept release is going to look like,” said Vahey. “Our members pound on the table about niche issues, but to my knowledge they’re not really focused on MSRB rules on primary offerings.”
“Nothing is jumping off the page at me,” he said.
MSRB executive director Lynnette Kelly recently hinted at a connection between the board’s primary offering effort and the Securities and Exchange Commission’s August 2015 enforcement case against Edward Jones. In that case, its first on primary market pricing of bonds, the SEC ordered the St. Louis based, retail-oriented dealer to pay more than $20 million for overcharging retail customers for new munis.
The SEC found that instead of selling new bonds to customers at the initial offering price as required, Edward Jones, acting as a co-underwriter, and the former head of its syndicate desk, took bonds into the firm’s own inventory and then improperly sold them to customers at higher prices. In some cases, the firm failed entirely to underwrite and offer the new bonds to investors until secondary market trading began.
The firm has since dropped out of the negotiated underwriting business. But while sources acknowledge that the Edward Jones case is likely a factor in the MSRB’s effort to update its rules, they said they generally prefer for the market to produce guidance or update practices rather than regulators.
“That is a process that we as a trade association are doing as well,” said Leslie Norwood, a managing director, associate general counsel, and co-head of municipal securities at the Securities Industry and Financial Markets Association. Norwood said that SIFMA has long maintained a model document for a master agreement among underwriters, a contract setting forth the legal relationships between syndicate members in a negotiated offering. Norwood said SIFMA feels that master agreement has served well, but is nonetheless working on updating it and hopes to have that done in the next few months.
“We’re looking at it as market participants working together contractually,” Norwood said. “The MSRB is certainly looking at it from a rules-based approach. We’re following the MSRB’s process towards rule change.”
Emily Brock, director of the Government Finance Officers Association’s federal liaison center, said GFOA members want to address the topic of primary offering disclosure in a new best practice that will be considered for approval this year, but that it has not lobbied the MSRB to propose further regulations on dealers or muni advisors. The MSRB does not regulate issuers, but does have a Dodd-Frank mandate to protect them.
“There are gray areas,” Brock said. “But no, we’re not asking for more regulation.”
The National Association of Municipal Advisors is also unsure of the MSRB’s specific aim, but has a general list of topics for which it will watch.
“NAMA will develop comments in response to specific practices the MSRB’s upcoming proposal will address,” said Susan Gaffney, the group’s executive director. “Some areas we will watch for include – ensuring issuer objectives are being followed, including structuring decisions; whether or not MSRB rules correspond with new Internal Revenue Service issue price rules; and if there are ways to enhance EMMA so that additional data can be utilized when pricing bonds.”
The MSRB has not committed to a timetable for the concept release, but has indicated it would likely be sometime in the fall.
The Bond Buyer
By Kyle Glazier
08/08/17 07:03 PM EDT
NEW YORK — A former Los Angeles investment banker imprisoned for 11 years for a stock manipulation scheme was sentenced on Friday to an additional five years for misappropriating proceeds from a bond issue by a Native American tribe.
Jason Galanis, 47, was sentenced by U.S. District Judge Ronnie Abrams in Manhattan, who also ordered him to forfeit more than $43 million.
“There simply aren’t enough words to fully express how profoundly sorry and remorseful I am,” Galanis, once dubbed “Porn’s New King,” said before the sentence was imposed. “I stand before you humiliated, utterly humiliated.”
Abrams said that while she was pleased to learn that Galanis had been teaching other inmates in prison, his conduct, which prosecutors say harmed both investors and the Oglala Sioux Nation in South Dakota, warranted a substantial punishment.
According to prosecutors, beginning in 2014, Galanis and his father, John, persuaded the Wakpamni Lake Community Corp, an affiliate of the Oglala Sioux Nation, to issue $60 million in municipal bonds.
Together with his father and five associates, Galanis and his co-defendants then misappropriated bond proceeds, prosecutors said. They said he obtained $8.5 million for himself to fund a lavish lifestyle.
The scheme left bond investors holding worthless securities, and the tribal corporation with no way to make interest payments due on the bonds, prosecutors said.
Galanis pleaded guilty to the scheme in January.
He had already pleaded guilty in July 2016 to a separate scheme to manipulate shares of the now defunct reinsurer Gerova Financial Group Ltd.
In February, U.S. District Judge Kevin Castel sentenced Galanis to 11 years and three months in prison for the Gerova scheme, also ordering him to forfeit $38 million, a mansion in Bel Air, California, and a $7 million apartment in New York.
Galanis was dubbed “Porn’s New King” by Forbes magazine in 2004 after buying the nation’s largest processor of credit card payments for internet pornography.
Three years later, the SEC fined him $60,000 after alleging he prepared false accounting information for Penthouse International Inc, in which he held a large stake.
By REUTERS
AUG. 11, 2017, 5:42 P.M. E.D.T.
(Reporting By Brendan Pierson in New York; Editing by Andrew Hay)
PHOENIX – The Municipal Securities Rulemaking Board is preparing to issue a concept release seeking market feedback on a broad range of primary offering practices, MSRB executive director Lynnette Kelly said Friday.
The concept release, a type of document the MSRB uses to seek input on potential rule changes, is large and should be released sometime in the next two months, Kelly said following the conclusion of the MSRB’s recent board meeting of its fiscal year, which ends on Sept. 30.
The MSRB has a number of rules that touch on primary offering practices, Kelly said, such as MSRB Rule G-11, on primary offering practices, MSRB Rule G-32, on disclosures in connection with primary offerings, and the collection of certain data.
MSRB executive director Lynnette Kelly said the MSRB wants to ask a lot of questions about primary offering practices.
Kelly specifically mentioned the Securities and Exchange Commission’s August 2015 enforcement case against Edward Jones and whether that might lead to rule changes. In that case, its first on primary market pricing of bonds, the SEC ordered the St. Louis based, retail-oriented dealer to pay more than $20 million for overcharging retail customers for new munis.
The commission found that instead of selling new bonds to customers at the initial offering price as required, Edward Jones, acting as a co-underwriter, took bonds into its own inventory and then improperly sold them to customers at higher prices. In some cases, the firm failed entirely to underwrite and offer the new bonds to investors until secondary market trading began.
In the wake of that case, SEC staff openly questioned whether industry practices needed to change.
Work on the concept release dates from around that time, or slightly afterwards, according to Kelly.
“This has been in motion 12-18 months,” she said.
The announcement of the release came a day after the MSRB reraised decades-old concerns about issuers selecting or influencing the selection of underwriter’s counsel prior to primary offerings, an issue Kelly described as a “tangent” to the concept release’s aim, as the MSRB has no authority to mandate issuer behavior.
Before adjourning, the board also agreed to file with the SEC changes to its Rule G-34 on CUSIP numbers. If approved by the SEC, the change would, for the first time, require non-dealer municipal advisors to be subject to the CUSIP requirement for new issue securities that are sold in competitive offerings.
Dealers had complained about the MSRB’s “clarification” that they are required to obtain CUSIP numbers for new issue securities sold in private placement transactions, including direct purchases, where the dealer is the placement agent.
The rule change includes an exception for dealers and municipal advisors from the CUSIP number requirements. Under the exception, CUSIP numbers are not needed for direct purchases by banks, their non-dealer control affiliates and consortiums, where the dealer or municipal advisor reasonably believes the purchaser’s intent is to hold the securities to maturity.
Kelly also noted that the deadline for registered MAs to take and pass the Series 50 qualification exam is Sept. 12, but that 128 of the 633 MA firms registered with the MSRB still do not have a single person who has passed the test.
The MSRB has been reaching out to MAs about this and has some concerns about the implications for issuers and for dealers who rely on the independent registered municipal advisor or IRMA exemption from MA registration when they provide advice to issuers. A pilot Series 54 exam for MA principals should be available in 2019, said Kelly.
The board agreed to revise draft amendments to Rule G-21 on dealer advertising, and to file them, along with a proposed new Rule G-40 on municipal advisor advertising, with the SEC. The MSRB said its proposed amendments to Rule G-21 would, among other things, enhance the MSRB’s fair-dealing provisions by harmonizing Rule G-21 with certain of FINRA Rule 2210’s content standards for advertisements, including testimonials. Similarly, proposed new Rule G-40 would set forth general provisions, address professional advertisements and require principal approval for advertisements by MAs.
Kelly said the board next week will announce new members and officers slated to take their seats on the MSRB’s Board when it begins its new fiscal year Oct. 1.
The Bond Buyer
By Kyle Glazier
Published July 28 2017, 12∶45pm EDT
Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today announced new officers and members of its Board of Directors who will begin their terms on October 1, 2017. Lucy Hooper, Executive Vice President at Davenport & Company LLC, will serve as Chair of the Board. Arthur Miller, Managing Director, Goldman, Sachs & Co., will serve his second term as Vice Chair.
“The Board revised the MSRB’s strategic goals this year to address the evolving dynamics of the municipal securities market,” said MSRB Executive Director Lynnette Kelly. “Our newly elected leadership represents a strategic combination of market expertise and continuity, and will provide a steady hand as we pursue these new goals.”
New members joining the Board for four-year terms beginning October 1, 2017 are William M. Fitzgerald, Sr., Founder, Fitzgerald Asset Management, LLC; Manju S. Ganeriwala, Treasurer, Commonwealth of Virginia; Seema Mohanty, Founder and Managing Director, Mohanty Gargiulo, LLC; Donna Simonetti, former executive director at JP Morgan; and Beth Wolchock, Managing Director, Oppenheimer & Co. Inc.
“I am delighted that we have attracted such a diverse and experienced class of new Board members, who will undoubtedly help advance the MSRB’s compliance, transparency and education objectives,” Kelly said.
The MSRB also announced that Board member Gary Hall, whose term was set to expire September 30, 2017, will serve an additional two years on the Board to complete the term of Pat Sweeney, who recently resigned from the Board due to a job change.
The Board, which has 11 independent public members and 10 members from firms regulated by the MSRB, including broker-dealers, banks and municipal advisors, establishes regulatory policies and oversees the operations of the MSRB. All Board members must be knowledgeable about the municipal securities market and were selected from more than 90 applicants.
Other Board members are J. Anthony Beard, Renee Boicourt, Robert Clarke Brown, Julia Harper Cooper, Ron Dieckman, Richard Ellis, Jerry W. Ford, Richard Froehlich, Lakshmi Kommi, Kemp J. Lewis, Chris Ryon, Edward J. Sisk and Dale Turnipseed.
MSRB Officers and New Board Members, Fiscal Year 2018
Chair-Elect Hooper has been an MSRB Board member since 2014. She currently serves on the Nominating and Governance Committee. Ms. Hooper is Executive Vice President at Davenport & Company LLC where she has served as Director of Fixed Income Sales and Trading since 2000. She joined the firm in 1981 and has held various fixed-income positions. Earlier she worked as a trader and in fixed income sales for First and Merchant National Bank, which became Sovran Bank. From 2000 to 2008, Ms. Hooper served as a subject matter expert on the MSRB’s Professional Qualifications Advisory Committee. She is past chair of the Board of Trustees at Randolph-Macon Woman’s College (now Randolph College), where she graduated magna cum laude and Phi Beta Kappa with a bachelor’s degree.
Vice Chair-Elect Miller has been an MSRB Board member since 2014 and will serve his second term as Vice Chair in the 2018 fiscal year. He is Managing Director of the Public Sector & Infrastructure Group in the Investment Banking Division of Goldman, Sachs & Co. Mr. Miller joined Goldman Sachs in 1985, where he serves as Co-head of the Public Finance Strategies and Analytics Group. He has previously worked in the firm’s New Product Development Group, and the Fixed Income Research Group. He started his career as an associate attorney at Mudge Rose Guthrie Alexander & Ferdon. Mr. Miller earned a bachelor’s degree from Princeton University, a master’s degree from the University of North Carolina, a law degree from Duke University School of Law, and a master’s of law from New York University.
William M. Fitzgerald, Sr. is the Founder of Fitzgerald Asset Management LLC where he manages debt portfolios for institutional and high-net worth investors. He also serves as the Founder and Chief Investment Officer at Global Infrastructure Asset Management LLC. where he manages investment vehicles that finance infrastructure projects with equity and debt. Prior to his current role, Mr. Fitzgerald was until 2008 a managing director and chief investment officer at Nuveen Asset Management, which he joined in 1998, and was ultimately responsible for $67 billion in assets under management. Mr. Fitzgerald has a bachelor’s degree from Beloit College and a master’s degree in business administration from the University of Chicago Booth School of Business. He also is a Chartered Financial Analyst.
Manju S. Ganeriwala is Treasurer of the Commonwealth of Virginia where she is responsible for overseeing the management of the Commonwealth’s investment portfolio, issuance of general obligation bonds and appropriation-backed bonds for debt-issuing authorities, management of outstanding debt, and administration of the State’s insurance and unclaimed property programs. She is chair of the Commonwealth’s Treasury Board and serves on 10 other public boards, including the Virginia Housing Development Authority, the Virginia Port Authority, the Virginia Resources Authority, and the Virginia College Savings Plan. Prior to becoming Treasurer in 2009, Ms. Ganeriwala served as a deputy secretary of finance at the Commonwealth of Virginia, where she advised the governor on all state financial matters, including crafting the state budget, developing revenue forecasts, issuing debt and retaining the Commonwealth’s “AAA” bond rating. Her earlier service to the Commonwealth includes leadership positions serving as the chief financial officer for the Virginia Department of Medical Assistance Services and as an associate director of the Virginia Department of Planning and Budget. She is a member and past president of the National Association of State Treasurers (NAST), a member and past chair of the State Debt Management Network, and a member of National Association of State Auditors, Comptrollers and Treasurers (NASACT). Ms. Ganeriwala is the recipient of multiple public finance awards including the NAST Harlan Boyles-Edward T. Alter Distinguished Service Award (2016) and the Jesse M. Unruh Award (2014), the Virginia Women in Public Finance Lifetime Achievement Award (2015), the Northeastern Women in Public Finance and the Bond Buyer, Trailblazing Women in Public Finance Award (2015), and NASACT’s President’s Award (2013). Ms. Ganeriwala has a bachelor’s degree from the University of Bombay and a master’s degree in business administration from the University of Texas at Austin.
Seema Mohanty is the Founder and Managing Director of Mohanty Gargiulo, LLC where she oversees client development, relationship management and daily operations of the capital markets advisory business, including derivatives and municipal bond pricing. She serves as swap advisor for sophisticated municipal securities issuers, including government and non-profit clients with large and complex derivatives portfolios. Prior to her current role, Ms. Mohanty was managing director and head of municipal derivatives and structured products at UBS, where she also managed the firm’s first book of credit facilities for tax-exempt clients. Earlier she served as managing director at Morgan Stanley, where she managed the issuer derivatives marketing group, and worked at JP Morgan early in her career. Ms. Mohanty has a bachelor’s degree from the University of Michigan and a master’s degree in business administration from the University of Chicago Booth School of Business.
Donna Simonetti is a former executive director at JP Morgan, where she was director of fixed income compliance. In that capacity, she advised the firm’s public finance department on compliance issues regarding the sales, trading, underwriting and investment banking of municipal securities. Prior to joining JP Morgan in 2008, Ms. Simonetti was managing director principal at Bear Stearns and Co., Inc., where she oversaw compliance activities in the firm’s municipal bond and public finance departments. Previously she was a senior vice president and senior business analyst in the municipal capital markets division at First Albany Capital, which she joined in 1981 and earlier served as a municipal credit analyst and institutional municipal sales principal. Ms. Simonetti began her career as a municipal credit analyst at Fidelity Management and Research Company. Throughout her career, Ms. Simonetti served on numerous industry committees and practice groups, including the MSRB’s Uniform Practice and Glossary Committees. She currently serves on the finance committee of the board of The Telling Room, a non-profit writing center. Ms. Simonetti has a bachelor’s degree from the State University of New York at Albany and a master’s of business administration from Northeastern University.
Beth Wolchock is Managing Director and Municipal Principal at Oppenheimer & Co. Inc., where she leads the firm’s municipal securities underwriting activities. In a career spanning more than 40 years, Ms. Wolchock has undertaken a progression of roles and responsibilities in underwriting and public investment banking arenas. Prior to joining Oppenheimer in 2013, Ms. Wolchock held positions at CastleOak Securities, LLP where she created the firm’s municipal department and established its underwriting business; at Jackson Securities, LLC, where she was a branch manager and oversaw sales and trading; and at Artemis Capital Group (later Dain Rauscher Inc.), where she was a senior vice president and managed the firm’s syndicate department. Earlier in her career, Ms. Wolchock was an underwriter and syndicate specialist successively at PaineWebber Inc., Kidder Peabody and Dean Witter Reynolds, Inc. Ms. Wolchock was a member of the Board of Governors for the Municipal Bond Club of New York. She has a bachelor’s degree from the State University of New York at Buffalo.
Date: August 2, 2017
Contact: Jennifer A. Galloway
202-838-1500
jgalloway@msrb.org
Washington, DC – The Municipal Securities Rulemaking Board (MSRB) received approval from the Securities and Exchange Commission (SEC) to amend MSRB Rule G-26, on customer account transfers, to modernize the rule and promote a uniform customer account transfer standard for all municipal securities dealers. The amendments will be effective on January 29, 2018. Read the approval notice.
“The MSRB recognizes the need to revisit its rules over time to ensure that they continue to achieve their purpose and reflect the current state of the municipal market,” said MSRB Executive Director Lynnette Kelly. “Updating our customer account transfer standards increases efficiency and reduces confusion and risk to investors, ultimately allowing them to better move their municipal securities to a dealer of their choice.”
Rule G-26 was adopted in 1986 as part of an industry-wide initiative to create a uniform customer account transfer standard for all dealers engaged in municipal securities activities. Today’s amendments update Rule G-26 to better harmonize with the customer account transfer rules of other self-regulatory organizations to promote the uniform standard.
The amendments are part of a broader retrospective review of the MSRB’s uniform practice rules, which previously resulted in changes to modernize close-out procedures and support the industry-wide shift to a T+2 settlement cycle. Read more about the MSRB’s regulatory efficiency initiatives.
Date: July 31, 2017
Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org
As an election loomed earlier this year, Los Angeles politicians were eager to prove that moneyed interests had not bought City Hall.
Five City Council members called for a ban on campaign contributions from real estate developers seeking city approvals, saying it would address the perception that L.A. engages in “pay-to-play” politics. One of them went even further, pushing for full public financing, a system that would bankroll campaigns with taxpayer money instead of checks from wealthy donors.
Six months later, neither proposal has had a hearing at City Hall.
Although both were referred to a council committee headed by council President Herb Wesson, no meetings have been scheduled so far. The effort to overhaul campaign funding did not come up last week, when Wesson laid out an ambitious agenda for the next 2 ½ years.
City leaders say they are still committed to reviewing the proposals. But neighborhood leaders and activists have been voicing doubts about whether they are serious.
“Look, it’s gone nowhere,” said Walter Hall, who serves on the board of the Greater Valley Glen Council. “Nothing has come out of the process since it started in January.”
The neighborhood council recently endorsed the developer donation ban, partly to prod city officials. Hall said his group also took action in response to a Times investigation into a real estate project known as Sea Breeze. The Times found more than $600,000 in contributions from donors linked directly and indirectly to the developer of that project, which was approved despite planning department opposition.
The proposals from city lawmakers to overhaul campaign finance laws were unveiled in January, when L.A.’s elected officials were fighting Measure S, a ballot proposal that would have imposed sweeping restrictions on real estate development. Measure S backers argued that wealthy developers use campaign contributions to persuade city politicians to approve out-of-scale building projects.
Developers spent millions to defeat the proposal, and voters rejected it in March.
Since then, backers of Measure S say City Council members have failed to follow through on their promises of reform. The proposed ban on developer donations is “completely dead as far as we can see,” said Jill Stewart, director of the Coalition to Preserve L.A., which pushed for passage of Measure S. “It was a lot of talk.”
City officials, in turn, say the proposals are very much alive — and will have a hearing at Wesson’s rules committee before the end of the year.
“I don’t kill anything. I don’t bury anything,” Wesson said. “But right now, I’ve got a rollout of an agenda that I think takes some priority.”
That agenda includes efforts to form a municipal bank, build more affordable housing, draft legislation to protect immigrants and hold a series of events aimed at improving race relations. Wesson’s committee also has been under the gun to finish crafting regulations for marijuana businesses before January, when licensed sales of recreational cannabis become legal across California.
The proposal to ban developer donations was co-authored by Councilman David Ryu, who was elected in 2015 after pledging not to accept such contributions. Nick Greif, a Ryu policy aide, said his boss wants a ban in place before fundraising begins for the 2020 city election — which leaves council members with time to deliberate.
“That said, we don’t want things to linger,” Greif added.
Councilman Paul Krekorian, who also sponsored the proposal, said he remains committed to keeping campaign finance reform at the top of this year’s agenda.
“We need to find solutions that build greater trust with the people we represent and make the entire system fairer and more transparent,” he said in a statement.
Three other politicians who backed the proposed ban on developer donations were running for reelection at the time — and faced challengers who had pledged not to accept donations from real estate developers needing city approvals.
Councilman Mike Bonin, who signed on to the developer donation ban, also brought forward a separate proposal for full public financing. Under such a system, candidates seeking public funding would have to get a minimum number of small donations from their constituents to demonstrate their campaigns are viable, then forgo any more fundraising.
Bonin spokesman David Graham-Caso said the plan is still being worked on. The councilman, he said, has not yet decided exactly when it would go to voters — in June or November of next year.
The public financing proposal will probably face opposition, said Michele Sutter, co-founder of the activist group Money Out Voters In, which supports the move.
“The folks who profit from this system and who get to wield greater influence as a result of it are not that interested in relinquishing that advantage,” she said.
A previous push for public financing in L.A. was abandoned after years of scrutiny. During those discussions, a city analyst warned public financing could be “very costly.”
If the system becomes too expensive, Angelenos may be reluctant to put additional public funds into political campaigns, said Jessica Levinson, president of the Los Angeles City Ethics Commission, which could be asked to vet the two campaign finance proposals.
“It can be tagged as welfare for politicians,” she said.
Levinson said that, even with a public financing system, wealthy donors could continue pouring unlimited amounts of money into independent committees that spend lavishly to support candidates. She also questioned whether a donation ban targeting developers would withstand a legal challenge. Other critics have argued that such a ban unfairly demonizes builders of much-needed housing.
In Valley Glen, however, the neighborhood council wants L.A. to go further by also prohibiting donations from developers who are “likely to submit plans” for projects in the future.
“Why would an out-of-town developer, or any developer, whose only business is to make money, give money [to a campaign] unless he thinks it’s going to be to his benefit?” said Hall, the neighborhood council member.
The Los Angeles Times
by Emily Alpert Reyes and David Zahniser
July 30, 2017
Long-time municipal market insiders can recall an era when pay-to-play was rampant and kickbacks were just the cost of doing business. But with the advent of rules of professional conduct and greater transparency, today’s municipal market participants operate with competence, accountability and integrity. The Municipal Securities Rulemaking Board (MSRB) carefully monitors market practices to identify threats to market integrity. One troubling practice from the market’s opaque past has persisted—the practice known as “issuer designation of underwriter’s counsel.”
Underwriters’ counsel are important members of the deal team. They assist underwriters with due diligence responsibilities, including conducting thorough and independent reviews of municipal securities issuers’ offering documents. The heightened regulatory scrutiny on the adequacy of due diligence performed by underwriters of municipal securities in the wake of the Securities and Exchange Commission’s Municipalities Continuing Disclosure Cooperation (MCDC) initiative underscores the importance of underwriters retaining independent, expert counsel.
Yet some municipal securities issuers designate the counsel of their underwriters, or exert undue influence in the selection. When counsel is selected by—and perhaps beholden to—the issuer, the counsel’s allegiance and ability to scrutinize the issuer’s documents with the necessary independence, rigor and expertise are called into question. Ultimately, there is the potential for investor harm if important and material information about the municipal securities or the issuer is misrepresented or omitted, whether purposefully or unintentionally. The underwriter also may suffer financial loss, reputational harm and fraud liability if it relies on insufficiently qualified or potentially conflicted counsel.
The MSRB first shone a light on this practice in 1998, articulating the view that underwriters “must be free to select counsel in whom they have confidence and who are free of the possibility of any conflicting allegiances to other parties involved in the underwriting process.” Since that time, several industry groups have offered best practices encouraging less issuer involvement in the selection of underwriter’s counsel. The MSRB has issued a market advisory to restate its concerns about the practice.
The MSRB recognizes that issuers often have compelling reasons for their involvement in selecting underwriter’s counsel, such as managing costs, retaining counsel already familiar with the issuer’s operations and finances and, in some cases, supporting women- or minority-owned firms. However, this practice gives rise to real or perceived conflicts of interest that undermine the integrity of the municipal market. This practice should not be a part of public finance.
The Bond Buyer
By Lynnette Kelly
Published July 27 2017, 2∶34pm EDT
Lynnette Kelly is Executive Director of the Municipal Securities Rulemaking Board
On July 12, 2017, the Financial Industry Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board (MSRB) published new implementation guidance on the bond mark-up disclosure requirements set to take effect next spring. Under amended FINRA Rule 2232 and amended MSRB Rules G-15 and G-30, effective May 14, 2018, dealers will be required to disclose on retail customer confirmations their mark-ups on most municipal and corporate bond transactions, calculated from the bond’s prevailing market price (PMP).
Babylon Supervisor Rich Schaffer has removed the town’s municipal finance adviser pending the outcome of a U.S. Securities and Exchange Commission investigation.
The SEC on June 30 asked town employees to preserve documents related to municipal bonding work by the adviser, Doug Jacob, a subcontractor for the town and former town comptroller, for evidence as part of a civil investigation, documents show.
The request to Town Attorney Joe Wilson states the agency believed the town may possess “documents and data that are relevant to an ongoing investigation.”
The letter, provided to Newsday by town spokesman Kevin Bonner, asks Babylon officials to preserve documents “created on or after Jan. 1, 2015 that concern the town’s issuance of general obligation bonds in 2015 and 2016; Red Hill Professional Services, Inc; and Douglas F. Jacob.”
Jacob, 56, of Pelham in Westchester County, owns Red Hill, a general services company founded in 2007 that provides workers to the town. Jacob served as comptroller for the town for a decade before resigning in December 2003.
The town does not contract directly with Red Hill or Jacob, who has an office in the Town Hall Annex. Babylon officials contract with Herbert L. Greene, a solid waste consultant, who subcontracts to Jacob and Red Hill to provide workers for several town departments.
The SEC letter did not provide details about the focus of the investigation. An agency spokeswoman declined to comment.
But Schaffer said Jacob had shown him a separate letter from the SEC to Jacob about the investigation indicating it focuses on whether Jacob had violated the federal Dodd-Frank Act, which aims for better financial industry regulation, including making sure advisers put the municipality’s interests ahead of their own.
At issue are Jacob’s dual roles as financial adviser to the town and head of a company that provides workers for the town, Schaffer said.
“The question is whether or not they believe there’s a conflict of interest” between Jacob’s two roles and his ability to provide unbiased advice on bonding, Schaffer said. “I don’t believe there is but I will leave it up to the professionals.”
Red Hill employees in 2016 worked in 16 town departments including transportation, drug and alcohol counseling, the fire marshal and the town attorney’s offices, according to documents. One of the employees is Jacob’s son, Max Jacob, who has worked in the controller’s office since 2010.
Doug Jacob is an SEC-registered municipal financial adviser and for more than a decade has been helping the town with annual bonding by acting as a “liaison between the town, the brokerage firms, and bond counsel,” according to Bonner. Jacob did not respond to requests for comment. A message left at a number listed for Red Hill — the same number as Jacob — was not returned.
The town bonded for $65 million in 2015 and 2016. The town has not bonded yet this year.
Wilson in a July 8 letter told town employees that they must abide by the SEC’s request to “preserve and retain” documents, noting the agency’s letter “should not be construed as an indication that the town has done anything improper or violated the law.”
Local governments frequently use advisers to help them decide how and when to issue the bonds and how to invest proceeds from the sales, according to the SEC’s website. The Dodd-Frank Act, passed in 2010, required advisers to register with the SEC.
Greene in 2016 submitted invoices to the town for himself, Jacob and 32 Red Hill workers totaling $1.5 million, according to documents.
Jacob invoiced $115,712 for his own services that year as a subcontractor, according to Bonner. Greene’s contract has one-year extensions running through the end of 2018.
Jacob was one of five top town officials who in 1997 were indicted on felony charges of falsifying documents filed with the state in order to hide a deficit.
Four of the officials were acquitted. Jacob was convicted in 1998 of eight misdemeanor counts of second-degree offering a false instrument for filing and was sentenced to probation.
Schaffer, who is also chairman of the Suffolk County Democratic Party, maintains the arrests were a political vendetta by then-Suffolk County District Attorney James Catterson Jr., a Republican. Schaffer said he believes Jacob was convicted of “actions every other town on Long Island takes” in moving money between the capital and operating funds.
Schaffer said Jacobs was used as a financial adviser on bonding because “he has a lot to offer the town and he’s one of the main reasons why we have one of the highest bond ratings of any municipality on Long Island.”
If the SEC finds a problem with Jacob’s work, he will be permanently removed as adviser — but the town will continue to subcontract with his company, Schaffer said.
“Red Hill provides a very valuable service to the town and allows us to continue to operate as we do and provide the services that we do in the 2 percent tax cap world,” he said.
Newsday.com
Updated July 30, 2017 6:00 AM
By Denise M. Bonilla
On July 12, 2017, the Financial Industry Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board (MSRB) published new implementation guidance on the bond mark-up disclosure requirements set to take effect next spring.1 Under amended FINRA Rule 2232 and amended MSRB Rules G-15 and G-30, effective May 14, 2018,2 dealers will be required to disclose on retail customer confirmations their mark-ups on most municipal and corporate bond transactions, calculated from the bond’s prevailing market price (PMP).3
Key insights from the new implementation guidance are summarized below. The guidance, provided in the form of frequently asked questions (FAQs), attempts to clarify when and how mark-ups should be disclosed and how to determine PMP, among other topics. Nevertheless, the FAQs may raise new questions as dealers work to overhaul their systems to comply with the controversial new requirements before the May 2018 deadline. FINRA and the MSRB coordinated on the publication of the FAQs, consulting with the Securities and Exchange Commission (SEC) in advance. Both FAQs use the same numbering scheme (followed here), with minimal differences between the two versions.
Last Updated: July 25 2017
Article by Paul R. Eckert, Bruce H. Newman and Daniel Martin
WilmerHale
Washington, DC – The Board of Directors of the Municipal Securities Rulemaking Board (MSRB) held its quarterly meeting July 26-27, 2017 where it discussed municipal advisor professional qualifications, primary market practices and market transparency developments related to promoting a fair and efficient municipal securities market.
Electronic Municipal Market Access (EMMA®) Website
Consistent with the MSRB’s new strategic goals that emphasize further evolving the EMMA website into a comprehensive transparency platform that meets the needs of municipal market participants and the public, the Board reviewed public and user feedback to improve the usefulness and usability of the EMMA website, and provided direction to staff on its priorities.
Municipal Advisor Professional Qualifications
The Board discussed professional qualifications requirements of municipal advisors, including the September 12, 2017 deadline for municipal advisors to take and pass the Municipal Advisor Representative Qualification Examination (Series 50). As of July 25, 2017, 128 municipal advisor firms registered with the MSRB did not have at least one person qualified with the Series 50 exam or enrolled to become so qualified. The Board considered potential implications for municipal entity and obligated persons clients that hire municipal advisors and for dealers who may rely on the “IRMA” exemption, which provides assurance that municipal entities have engaged an independent registered municipal advisor to act as their fiduciary. The Board requested staff to continue its education and outreach campaign to inform market participants, and will closely monitor the issue. The MSRB is holding a webinar at 3:00 p.m. ET on August 10, 2017 called, “What to Expect from Your Municipal Advisor,” which will include a discussion on the potential implications for municipal entities of the upcoming municipal advisor exam deadline. Register for the webinar here.
The Board also discussed the next step in the development of the municipal advisor principal exam, which is to conduct a job analysis of municipal advisor principals to further develop the content outline for the principal exam. The MSRB anticipates that the principal exam will be available as a pilot in 2019.
Primary Offering Practices
The Board discussed comments received on proposed changes to MSRB Rule G-34, on CUSIP numbers, new issue and market information requirements, and agreed to file amendments with the SEC. The changes seek in part, to provide clarity and flexibility for dealers and municipal advisors in obtaining CUSIP numbers for new issues of municipal securities. The proposed changes would clarify the rule’s definition of “underwriter” to reflect the MSRB’s longstanding public interpretation that placement agents, when engaged in private placements, including direct purchases, are underwriters for purposes of Rule G-34. The proposed changes would amend the rule to make all municipal advisors in competitive sales of municipal securities subject to the CUSIP number requirements, thereby addressing any potential regulatory inefficiencies in competitive sales of new issues. The proposed changes would also establish an exception for dealers and municipal advisors from the CUSIP number requirements, and for dealers from the depository eligibility requirements, for direct purchases by banks, their non-dealer control affiliates and consortiums thereof, where the dealer or municipal advisor reasonably believes the purchaser’s present intent is to hold the securities to maturity.
The MSRB is currently engaged in a multi-year review of primary offering practices to identify any necessary revisions to existing rules or the need for guidance to support existing protections for municipal securities investors and issuers. At its meeting, the Board agreed to publish a concept proposal seeking industry and public input on possible changes to the primary offering rules and practices of dealers in municipal securities such as aspects of MSRB Rule G-11, on primary offering practices, and MSRB Rule G-32, on disclosures in connection with primary offerings, and data points collected under the rule.
Advertising Rules
The Board discussed comments received on draft amendments to the MSRB’s proposal to update and harmonize certain provisions of its municipal securities dealer advertising rule, MSRB Rule G-21, with those of other financial regulators, and to create similar advertising standards for municipal advisors. In response to market feedback, the Board agreed to revise draft amendments to Rule G-21 and to file them, along with proposed new Rule G-40, on municipal advisor advertising, with the Securities and Exchange Commission (SEC). The proposed amendments to Rule G-21 would, among other things, enhance the MSRB’s fair-dealing provisions by harmonizing Rule G-21 with certain of FINRA Rule 2210’s content standards for advertisements, including testimonials. Similarly, proposed new Rule G-40 would set forth general provisions, address professional advertisements and require principal approval for advertisements by municipal advisors.
Reporting of Information on Municipal Fund Securities
The Board discussed the MSRB’s collection of data relating to municipal fund securities, specifically, ABLE (Achieving a Better Life Experience Act) programs and 529 college savings plans, and directed staff to continue work on several projects related to such data collection.
Date: July 28, 2017
Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org
The Municipal Securities Rulemaking Board (MSRB) today published a market advisory addressing the practice of municipal securities issuers designating the counsel of their underwriters, or influencing the underwriter’s selection of counsel. The MSRB’s advisory restates concerns first raised by the organization in the 1990s that investors may be harmed in a variety of ways in any offering process that does not properly utilize the review, guidance and counseling of an independent, competent and appropriately critical underwriter’s counsel. To minimize conflicts of interest and to reduce any influence by an issuer that may call into question the qualifications or independence of the underwriter’s counsel, the MSRB suggests that an issuer refrain from involving itself in the underwriter’s selection of counsel or that an issuer’s involvement in such process be minimal and limited to concerns regarding competency, conflicts of interest and the avoidance of excessive costs.
Last week, the MSRB issued “guidance” on the application of Rule G-42 conduct standards for Municipal Advisors in conduit issues. The “guidance” highlights ambiguities from the “for or on behalf” language in the MA Rule when applied to conduit issues (where the MA interacts with both the municipal issuer and the conduit borrower).
Beyond issue-spotting though, the “guidance” merely urges care and defers to the SEC for after-the-fact “facts and circumstances” determinations. In fact, it includes a “don’t ask us” disclaimer: These “are interpretive issues that are solely within the jurisdiction of the SEC. Requests for interpretation regarding such issue should be direct to the SEC’s Office of Municipal Securities.”
Extended to MAs in December 2015, Rule G-42 sets out conduct and disclosure standards following from an MA’s statutory fiduciary duty to Municipal Entities (“ME”) and duty of care to Obligated Persons. In a conduit borrowing, the governmental issuer is an ME and the conduit borrower is an Obligated Person (but might also be an ME).
There are six take-aways from the guidance:
MSRB’s guidance discusses potential conflicts and issues in five scenarios involving MAs’ involvement in conduit borrowings.
The same considerations apply to explicit dual representations, where:
The guidance is MSRB Regulatory Notice 2017-13 (July 13, 2017), here.
Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas and Louisiana. He has over 30 years’ experience representing financial institutions in litigation, regulatory and compliance matters. See attorney profile. © 2017 by Thomas K. Potter, III (all rights reserved).
The House Financial Services Committee on July 25 unanimously voted to report the Municipal Finance Support Act of 2017, H.R. 1624, to the full House of Representatives for consideration. The legislation, introduced by Representative Luke Messer (R-IN), would allow large banks to count some of their municipal bond investments, including tax-exempt housing bonds, as high-quality liquid assets (HQLAs) under federal bank liquidity standards. NCSHA and several other state and local organizations supported the bill.
H.R. 1624 would modify a regulation the Federal Reserve, the Department of Treasury, and the Federal Deposit Insurance Corporation (FDIC) released in October 2014 to ensure that large banks hold enough liquidity to continue making payments during periods of financial stress. Under the rule, banks with at least $250 billion in assets (or $10 billion in foreign exposure on their balance sheet) must maintain a minimum liquidity coverage ratio (LCR) comprised of certain financial investments that are considered HQLAs. The rule took effect at the beginning of 2017.
A previous summary of H.R. 1624 by NCSHA can be found here.
The legislation has 18 cosponsors: Republicans Randy Hultgren (IL), Peter King (NY), Bruce Polquin (ME), Richard Hudson (NC), Carlos Curbelo (FL), and Dennis Ross (FL); and Democrats Carolyn Maloney (NY), Gregory Meeks (NY), Robin Kelly (IL), Terri Sewell (AL), Kyrsten Sinema (AZ), Eleanor Holmes Norton (DC), Gwen Moore (WI), Marc Veasey (TX), Brad Sherman (CA), Ron Kind (WI), Nydia Velazquez (NY), and John Delaney (MD).
There is a similar bill in the Senate introduced by Senators Mark Warner (D-VA) and Mike Rounds (R-SD), S 828. Though the bill has been referred to the Senate Banking Committee, the Committee has not scheduled action on it.
JULY 28, 2017
BDA Comment Letter Summary
Recent BDA Actions
Bond Dealers of America
July 17, 2017
The Board of Directors of the Municipal Securities Rulemaking Board (MSRB) will meet July 26-27, 2017 in Washington, DC, where it will discuss the upcoming municipal advisor professional qualification deadline, public and user feedback on its Electronic Municipal Market Access (EMMA®) website and other rulemaking and policy topics.
The Municipal Securities Rulemaking Board (MSRB) today filed with the Securities and Exchange Commission (SEC) amendments to MSRB Rule A-13, on underwriting and transaction assessments for brokers, dealers and municipal securities dealers, to assess a new annual fee on dealers acting as underwriters to 529 college savings plans. The amendments are effective immediately. The new fee is based on a percentage of total aggregate plan assets as of December 31 each year, as required to be reported by an underwriter on MSRB Form G-45. The MSRB will invoice for the new underwriting fee beginning in May 2018.
A key strategic priority of the MSRB is the financial sustainability of the organization, facilitated by the fair and equitable assessment of fees across all regulated entities. The new underwriting fee will defray the MSRB’s costs of operating and administering its rulemaking, market transparency and educational activities concerning dealers acting as underwriters to 529 college savings plans.
WASHINGTON – The Municipal Securities Rulemaking Board’s introduction of EMMA and its subsequent requirements for dealers to disclose near-real time information on the system has narrowed measures of market inefficiencies like price volatility and price differentials but has not eliminated the advantage institutional investors have over retail investors, according to a study from Komla Dzigbede.
The paper was one of several chosen to be presented as part of the Brookings Institute’s annual Municipal Finance Caucus here. Dzigbede, an assistant professor at Binghamton University, was invited to present the paper during one of the conference’s sessions.
The study, published this month, explores secondary market trade data on California state general obligation bonds issued between 2005 and 2014. That period of time was chosen to cover the span before EMMA was launched in March 2008 as well as the time after the MSRB’s 2009 introduction of requirements for dealers to report information to the new system. The requirements touched on, among other things, auction rate securities disclosure and all-electronic official statement dissemination standards. They also included mandatory disclosure of trade information on a near real time basis to EMMA.
EMMA and the establishment of the subsequent disclosure requirements to the system have helped
investors by giving those in the market more information to use as they carry out transactions,
Dzigbede said.
Regulators “must respond more effectively to counteract disparities in information flow and rent-seeking behavior, which creates unequal opportunities for the retail investor segment of the market,” said Komla Dzigbede, assistant professor at Binghamton University.
Average daily trade prices rose in the post-regulatory period while trade price differentials decreased by an average of $0.18. Dzigbede said that the trade price rise may be attributable to investors’ gradually demanding increased yields as more information on bonds became available because of the increased disclosures. That increase in information may also be the underlying cause of the trade price differential decline as investors were more able to assess the value of bonds, he said.
Trade volatility, which Dzigbede said is generally associated with an inefficient market, declined by 0.26% in the post-EMMA regulation period, according to the data. While that is good news and shows the regulations were effective, Dzigbede said that the data shows that institutional investors benefited more from the changes, seeing a higher margin of decline for volatility than retail investors.
He said that finding confirms “evidence on the inequities in trade pricing that tend to favor large investors over small investors in municipal securities secondary markets.”
So while the regulation was generally good for the market and “should give renewed impetus” to such regulatory efforts, there is still work to be done to lessen the advantage institutional investors have, Dzigbede said.
He added that regulators “must respond more effectively to counteract disparities in information flow and rent-seeking behavior, which creates unequal opportunities for the retail investor segment of the market.” One way to do that, according to Dzigbede, is to identify spaces within the market that are attractive to retail investor trades and target protective regulatory schemes there.
He also said it is important for the MSRB and Securities and Exchange Commission to help educate investors, especially small ones, about things like complex, sophisticated debt instruments and the mechanics of trading portfolios and the risks associated with them.
Karol Denniston, a partner with Squire Patton Boggs in San Francisco who specializes in bankruptcy matters who was chosen to comment on Dzigbede’s paper, said that the market is “never going to be an even playing field” between institutional and retail investors.
Institutional investors have “more information, bigger purchases, and better access to the market,” Denniston said. “I’m not sure if we’re ever going to see a level of disclosure that is going to balance out” retail and institutional investors.
She agreed with Dzigbede that regulators need to focus more on promoting and ensuring strong disclosure in the municipal market but said the enforcement of the disclosure provisions is particularly important right now as states like California deal with funding pensions and other post employment benefits.
“The premise of the paper is good, disclosure will make the market more efficient,” Denniston said.
“[But] there needs to be some mechanism to enforce [disclosure regulations] so people take it seriously. We need some teeth.”
Her comments are drawn from experiences she has had while working with troubled entities. She said that she sees some issuers having financial troubles that are reluctant to report them because they want to try to keep up appearances. That lack of disclosure is especially problematic as states and municipalities confront a variety of fiscal challenges like pensions, she said.
The Bond Buyer
By Jack Casey
Published July 18 2017, 11∶13am EDT
In preparing the municipal bond market in late 2015 for a new order-handling standard, the Municipal Securities Rulemaking Board took note of an important trend. “As the availability of electronic systems that facilitate trading in municipal securities increases,” the MSRB wrote, “dealers need to determine whether these systems might provide benefits to their customer order flow.”
The MSRB’s guidance underscored a development seen in other markets and asset classes when electronic trading takes hold. As regulators move to raise execution standards, electronic trading comes to play a significantly more important role in the compliance process.
That is especially the case in a market as complex and fragmented as municipal bonds. Though about half the size of the U.S. corporate bond market in value, the muni market features about 20 times the number of securities and about 10 times the number of issuer entities, by one researcher’s estimate. Those totals include a complicated variety of coupons and structures, as compliance officers can attest. It’s not surprising that a large number of muni issues trade rarely.
Electronic trading proves especially valuable in markets such as municipal bonds, where liquidity is highly dispersed and discontinuous. Market participants gain the power to conduct price discovery efficiently across a broader range of potential counterparties, identifying trading opportunities not available to them through typical voice and messaging channels. Adding to the power of electronic trading in the municipal bond market in the last several months is the emergence of an “all-to-all” marketplace, in which dealers as well as asset managers can interact with one another on an anonymous basis.
In helping solve the muni market’s liquidity puzzle, electronic trading has, in effect, raised the bar on best execution. Market participants who embrace fully integrated electronic trading strengthen their ability to achieve and validate best execution. Overall, electronic trading puts them in a better position to assess market quality across multiple sources of liquidity, audit their activities, measure their outcomes, fine-tune their policies and practices, manage operational risks and respond to customers.
Rule G-18’s Execution Standard
Reflecting the muni market’s complexities and its over-the-counter status, regulatory views on best execution have evolved slowly. It was only last year when the Municipal Securities Rulemaking Board put into effect its first explicit rule for best execution.
MSRB Rule G-18 creates “an order-handling and transaction-execution standard.” The rule requires dealers to exercise “reasonable diligence” to determine the best market in the security it seeks to trade on behalf of a customer. Then dealers must buy or sell securities in that market so that the resulting price to the customer “is as favorable as possible under prevailing market conditions.”
In its guidance, MSRB instructed dealers to establish policies spelling out how they meet the standards, and to review these annually in light of changes in market conditions and market structure, among other factors. The standard does not apply to investors with at least $50 million in assets as long as they affirm that they meet the MSRB definition of “sophisticated municipal market professionals,” or SMMPs. Also excluded are inter-dealer trades, though customer trades cleared through another dealer are covered by the standard.
It was in the context of identifying the “best market” that the MSRB took note of the growing importance of electronic trading in its guidance in late 2015.
Since then, the emergence of the “all-to-all” electronic marketplace has begun to change the context for addressing the MSRB’s standard. By bringing together bids and offers of major national and regional dealers as well as institutional investment managers, the “all-to-all” environment provides a previously unavailable, dynamic view of market quality and conditions incorporating a wide range of liquidity sources. Potential buyers and sellers see not only levels offered by dealers, but those offered by investment managers as well.
Operational Benefits
With these pricing and liquidity insights come a number of significant operational advantages. At the pre-trade stage, pricing history and current quotes are easily viewed, as well as evaluative data from two widely used sources. Pre-trade and post-trade integration with order management systems helps manage exposures and reduce operational risks. Rounding out these efficiencies is automated settlement.
Of prime importance to the compliance process is the detailed audit trail generated by electronic trading. This gives compliance staff a record of market conditions and levels available at the time of the trade. Audit trails open the way for post-trade analysis and provide relevant data for the annual reviews of dealers’ policies and procedures required by Rule G-18. For investment managers, the audit trail can help them assess the quality of execution they are receiving.
As has been seen in other fixed-income categories, electronic trading starts slowly and then adoption rates over time tend to accelerate. Though in its early stages, all-to-all trading is poised to become a more important factor in the consolidation of muni market liquidity as investment managers grow more comfortable “making” prices as well as “taking” them. In that scenario, best execution — how to achieve and validate it efficiently and credibly — looks likely to remain among the leading factors driving increased adoption of electronic trading in the muni market in the months and years ahead.
The Bond Buyer
By Hardy Manges
July 10 2017, 9:00am EDT
Hardy Manges is Head of Municipal Dealer Sales at MarketAxess, responsible for new business development and strategy, training, and relationship management with dealers in the institutional municipal market.
WASHINGTON – The Securities Industry and Financial Markets Association is urging the Securities and Exchange Commission to reject proposed Municipal Securities Rulemaking Board changes on customer account transfers, saying the amendments are inefficient and that the board would be better off simply cross-referencing other regulators’ rules.
Bond Dealers of America is not asking the SEC to disapprove the proposal, but is seeking several changes including extending the period between when the changes are adopted and when they become effective to give dealers more time to adjust to a number of amendments taking effect then.
The SIFMA and BDA comments respond to an SEC filing from the MSRB containing proposed changes to MSRB Rule G-26 on customer account transfers. Rule G-26 currently requires dealers to cooperate in the transfer of customer accounts and includes various procedures for carrying out the transfer process. A transfer occurs when a customer decides to transfer an account from one dealer, the carrying party, to another, the receiving party. G-26 lays out specific time frames during which the transfers must occur as well as limits on why the receiving party can protest a customer’s transfer instruction.
The rule was adopted in 1986 and is part of an industry-wide initiative to create a uniform customer account transfer standard, according to the MSRB. The standard is primarily driven by the Automated Customer Account Transfer Service (ACATS) of the National Securities Clearing Corp. (NSCC). ACATS is a system that facilitates the transfer of securities from one trading account to another at a different brokerage firm or bank.
The MSRB’s rule, which governs municipal security-only customer account transfers, is similar to other self-regulatory organization rules, such as New York Stock Exchange’s Rule 412 and Financial Industry Regulatory Authority’s Rule 11870. The MSRB periodically modifies its requirements under G-26 to conform to provisions in the parallel rules of other self-regulatory organizations, which have changed somewhat in recent years, so that there is a consistent standard.
SIFMA echoed its past comments to the MSRB in its most recent letter, saying that Rule G-26 in its current form is unnecessary and that dealers would be better off having the MSRB cross-reference the other regulators’ rules, particularly FINRA Rule 11870.
“SIFMA and its members feel the proposed amendments take an approach that is a step backward; instead of supporting rulebook simplification and harmonization and promoting automation to facilitate faster transactions, the proposed amendments are inapposite,” wrote Leslie Norwood, managing director and associate general counsel with SIFMA.
Norwood added that SIFMA still believes that most of the firms subject to G-26 and no other regulatory rules regarding account transfers don’t participate in ACATS anyway.
The MSRB responded to FINRA’s past suggestions by saying that if it were to simply incorporate FINRA’s Rule 11870 by reference, it “potentially could be seen as delegating its core mission to protect investors, issuers, and the public interest and to promote a fair and efficient municipal market.”
SIFMA said it strongly disagrees with the MSRB’s rationale for rejecting their recommended approach and pointed to other MSRB rules like G-41 on anti-money laundering compliance program and G-35 on arbitration that include cross-references.
“In this instance, the MSRB would not be seen to be delegating its core mission to protect the municipal securities market, as there is nothing particularly unique regarding the transfer of customer accounts with respect to municipal securities,” Norwood wrote.
She added that if the MSRB stays with its decision against cross-referencing, it could choose to instead allow FINRA member firms to follow FINRA 11870 and NYSE member firms to follow NYSE Rule 412 instead of G-26 while also requiring firms not covered by either to follow Rule G-26.
“If the primary purpose of the changes and the draft amendments is to re-establish consistency with ACATS and the rules of other SROs by conforming G-26 to significant updates by the NSCC, the NYSE and FINRA that have relevance to municipal securities, the best way to accomplish this is to have one governing rule that is cross-referenced by the other self-regulatory organizations,” Norwood wrote.
Additionally, SIFMA said that having different rules for account level transfers could result in: additional compliance burdens, conflicting examiners from different regulators applying different rules to the same customer account transfer, and confusion among customer.
“We feel these reasons are significant enough to warrant complete rule harmonization governing these procedures,” Norwood wrote.
Both SIFMA and BDA included concerns in their letters about the need to harmonize the timeframes under MSRB Rules G-26 and G-12 on uniform practice with FINRA rule 11870 because G-12 was recently amended to shorten the amount of time dealers had to close out account transfer fails.
Both dealer groups said FINRA should harmonize its rule to those of the MSRB.
BDA also proposed that the effective date be changed from some time around January 2018 to about 180 days after the adoption of the Department of Labor’s principal trading and best interest contract exemptions, which are to become applicable on Jan. 1, 2018. The group said that having an effective date around January 2018 would add to already significant regulatory changes dealers will have to be adjusting to around that time.
BY SOURCEMEDIA | MUNICIPAL | 07/06/17 07:08 PM EDT
By Jack Casey
Washington, DC – The Municipal Securities Rulemaking Board (MSRB) announced today that it has promoted Michael L. Post, who has held leadership roles in the MSRB’s Market Regulation department since 2013, to serve as General Counsel. In this role, Post will serve as senior legal counsel and policy advisor to the Board of Directors, and will oversee Board governance, rulemaking for municipal securities dealers and municipal advisors, regulatory relationships and legislative affairs.
“Mike has successfully guided the MSRB’s regulatory affairs through an intense period of rulemaking, driven in part by our expanded mandate under the Dodd-Frank Act and the priorities outlined in the 2012 Securities and Exchange Commission Report on the Municipal Securities Market,” said MSRB Executive Director Lynnette Kelly. “He is a trusted advisor to the Board and we are thrilled to have him step into this role as our Chief Legal Officer, Bob Fippinger, departs at the end of the month.”
Before joining the MSRB as Deputy General Counsel in 2013, Post served for more than 10 years in various senior roles at the Securities and Exchange Commission (SEC). From 2007 to 2009, he was Counsel to Chairman Christopher Cox, advising on a wide range of legal, policy and management issues arising primarily out of the Division of Trading and Markets, Division of Enforcement and Office of Municipal Securities. He also served as a senior litigation counsel in the appellate group in the SEC’s Office of the General Counsel and received the Manuel F. Cohen Outstanding SEC Younger Lawyer Award. From 1998 to 2003 Post was in private practice in the Supreme Court and appellate litigation group at Sidley Austin LLP. He began his legal career as a judicial law clerk to Judge Paul J. Kelly, Jr. on the U.S. Court of Appeals for the Tenth Circuit.
Post earned a juris doctor from The George Washington University Law School, a master’s of public administration degree in public policy analysis from Arizona State University and a bachelor’s degree in economics from the University of California, Los Angeles.
The MSRB also announced that it has named Gail Marshall Chief Compliance Officer. Marshall has served as Associate General Counsel – Enforcement Coordination since 2015. She is responsible for managing the MSRB’s professional qualifications program, enforcement support initiatives and internal corporate legal activities.
“Gail is an indispensable resource for fellow securities regulators and MSRB-regulated firms,” Kelly said. “She works tirelessly to support industry needs and facilitate regulatory compliance.”
Prior to joining the MSRB as Associate General Counsel in 2015, Marshall served as Of Counsel at Bingham McCutchen LLP from 2000-2015 where she advised broker-dealers and investment advisers on compliance with federal, state and self-regulatory organization regulatory matters, and represented clients in examination and enforcement proceedings. Earlier she was an attorney with the SEC where she served as special counsel to Commissioner Isaac C. Hunt, Jr., as well as special counsel in the Division of Trading and Markets and Division of Enforcement.
Marshall received a master’s of law in securities and financial regulation from Georgetown University Law Center, a juris doctor from New England School of Law and a bachelor’s degree in management from Westfield State University.
Date: July 10, 2017
Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org
Washington, DC – In advance of the May 2018 implementation of landmark new regulations that enhance the transparency of costs associated with municipal securities transactions for retail investors, the Municipal Securities Rulemaking Board (MSRB) is providing extensive guidance to assist municipal securities dealers in preparing to comply.
Amendments to MSRB Rule G-15 require dealers to disclose additional information on retail customer confirmations for a specified class of principal transactions, including the dealer’s mark-up or mark-down as determined from the prevailing market price of the security. Today’s guidance, provided in a clear question-and-answer format, addresses the new confirmation disclosure requirements, determination of the prevailing market price and disclosure to customers of the time of execution of trades and link to more security information on the Electronic Municipal Market Access (EMMA®) website. Read the FAQs.
“By offering additional guidance with nearly a year remaining for firms to prepare, the MSRB aims to facilitate the industry’s adoption of this historic new level of price transparency for retail investors,” said MSRB Executive Director Lynnette Kelly. “Today’s guidance is one example of the MSRB’s renewed commitment to supporting regulated entities’ compliance with new and existing standards of conduct. Regulated entities can expect to see additions to these FAQs as more questions on the mark-up rule arise, as well as best practices and other compliance resources on a variety of topics in the months ahead.”
The mark-up disclosure requirements were approved by the Securities and Exchange Commission on November 29, 2016 and take effect on May 14, 2018, affording dealers approximately 18 months from the adoption of the amendments to develop appropriate processes and systems.
To further support understanding of and compliance with changes to Rule G-15, the MSRB will host a half-day seminar on November 2, 2017 in Washington, DC to give municipal securities dealers the opportunity for an in-depth discussion of the mark-up disclosure requirements and the determination of prevailing market price. Register to attend. Register to participate via webcast.
If needed, the MSRB will host a half-day seminar on an additional date in 2018 to provide further opportunity for in-depth discussion. The MSRB also will be providing education to retail investors to promote understanding of the new information available on their trade confirmations.
The MSRB continues to work in coordination with the Financial Industry Regulatory Authority (FINRA), which has adopted similar confirmation disclosure rules and corresponding guidance for other areas of the fixed income markets.
Date: July 12, 2017
Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org
Washington, DC – The Municipal Securities Rulemaking Board (MSRB) and the Municipal Forum of New York will host recent high school graduates participating in the 2017 Urban Leadership Fellows Program for “Municipal Finance Day” in Washington, DC on Friday, July 14, 2017.
“This is the sixth consecutive year that the MSRB has connected young people who are interested in careers in public finance with the industry’s regulators and policymakers,” said MSRB Executive Director Lynnette Kelly. “Each year we are energized and excited to inspire the next generation of leaders and innovators in the municipal securities market.”
The Urban Leadership Fellows Program provides underserved graduates of New York City’s public high schools with an opportunity to explore careers in finance through a paid summer internship. The participants’ visit to Washington, DC supplements the practical skills gained at their internships with an understanding of the legal, regulatory and policy implications facing the municipal securities market.
This year’s featured speakers at Municipal Finance Day include Representative Gwen Moore of Wisconsin; Hester Peirce, Director, Financial Markets Working Group and Senior Research Fellow, Mercatus Center at George Mason University; and MSRB Executive Director Lynnette Kelly.
The Municipal Forum of New York has sponsored the Urban Leadership Fellows since 1992 through its Youth Education Fund.
Date: July 13, 2017
Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org
To facilitate compliance with its Rule G-42, on duties of non-solicitor municipal advisors, the Municipal Securities Rulemaking Board (MSRB) today provided interpretive guidance addressing the applicability of the rule in several scenarios that may arise in connection with the issuance of municipal securities for a conduit borrower. The MSRB’s guidance discusses a municipal advisor’s relationship(s) with, and duties and obligations owed to, a municipal entity issuer, an obligated person that is a conduit borrower, or both, in these scenarios.
WASHINGTON – Market groups are asking the Municipal Securities Rulemaking Board to broaden a potential exception to its proposal to clarify that CUSIPs are required for private placements, saying the current version doesn’t go far enough because it excludes non-bank entities.
The groups made their requests in comment letters responding to a modified proposal from the MSRB on its Rule G-34 on CUSIP numbers. The original proposal, released for comment on March 1, clarified that Rule G-34 requires dealers to obtain CUSIP numbers for new issue securities sold in private placement transactions, including direct purchases, where the dealer is the placement agent. The proposal also broached adding a requirement that non-dealer municipal advisors for the first time be subject to the CUSIP requirement for new issue securities that are sold in a competitive offering.
The board recast that proposal in June in response to market concerns by adding an exception for private placements that involve a limited number of participants and are not expected to be resold. The exception would allow a dealer acting as an underwriter or a placement agent in a new private placement with a bank to “elect not to apply for assignment of a CUSIP number if the dealer has a reasonable belief that the purchasing bank is likely to hold the securities to maturity or limit the resale of the municipal securities to another bank.”
It would also apply for MAs in competitive sales of munis where the securities are purchased directly by a bank and the MA believes the bank will hold the securities to maturity or limit any resale to another bank.
Leslie Norwood, managing director and associate general counsel with the Securities Industry and Financial Markets Association, said SIFMA and its members “welcome” the MSRB’s exception but believe “that the exception should be clarified to clearly accommodate similar non-bank purchasers.”
SIFMA, in addition to the American Bankers Association, is proposing language that would provide an exception for dealers or MAs if the underwriter or MA reasonably believes that the purchaser of the munis is: a bank; any entity directly or indirectly controlled by the bank or under common control with the bank other than a broker-dealer; or a consortium of the previous institutions used to participate in a purchase of a new issue of municipal securities.
The SIFMA-proposed exception would also require that the munis are either being purchased with no present intent to sell or distribute or that resales will be limited to the institutions described above or qualified institutional buyers or accredited investors as defined by Securities and Exchange Commission rules.
ABA’s proposed exception differs from SIFMA’s in that it specifies that the exception should apply if the purchasers represent their intentions not to resell and to only resell to the particular investors named, meaning dealers and MAs could rely on the investors’ representations. SIFMA does not specifically include the need for a representation.
Bond Dealers of America agreed that the exception should apply to non-bank affiliates. It, along with Bloomberg’s Open Symbology Group, also suggested that the MSRB consider moving away from a CUSIP requirement and instead allow other security identifiers.
SIFMA said that in the absence of the language it is proposing, the MSRB should clarify the documentation underwriters and MAs would be required to produce during a regulatory examination. It is asking that a reasonableness standard apply and made clear that written guidance from the MSRB “would be extraordinarily helpful.”
The MSRB said in its June proposal that it expects both dealers and MAs to have policies and procedures in place that are reasonably designed to help them come to conclusions about whether to get a CUSIP number. Dealers and MAs would also be expected to document their findings that play into any ultimate determinations about whether to get CUSIPs. However, it said it would not set prescriptive steps to comply with the exception, specify instances where the exception would apply, or define the parameters for how a dealer should craft its policies and procedures.
Emily Brock, director of the Government Finance Officers Association’s federal liaison center, said GFOA supports the ABA’s representation idea because it would address the group’s concern that the original exception language was not clear enough and would ultimately damp demand for bank loans and direct purchase financings. The language ABA is proposing would “allow for all participants to rely on the investor’s representation and will add certainty that CUSIPs are not assigned to those securities,” Brock said.
The National Association of Municipal Advisors agreed with GFOA and ABA in its comment letter, saying the inclusion of the “represent” language would mean “all parties will have a better understanding and ability to ensure that the intent of the investor is known based on fact.”
NAMA also said it is concerned that the process for getting CUSIPs under the proposal would require dealers and MAs to get the CUSIPs before they can determine if they are needed and leave them without the possibility of reimbursement if the CUSIPs are ultimately unnecessary.
Both GFOA and NAMA also said the MSRB should consider including exceptions for other situations like state and local government bonds purchased by other state and local governments with no intention to resell.
NAMA also reiterated its opposition to the MSRB’s intent to require non-dealer MAs to be subject to the CUSIP requirement, saying the requirement does not align with the regulatory structure or roles and responsibilities associated with MAs.
The requirement would not benefit MA clients, would create confusion when a competitive deal does not have an MA involved, and would blur the line between MA and dealer activity, according to Susan Gaffney, executive director of NAMA and author of the group’s letter.
“Instead of expanding the current responsibility of MAs to obtain CUSIPs in competitive sales, the MSRB should altogether eliminate the responsibility of having any MA (independent or broker/dealer MAs) obtain CUSIP numbers,” Gaffney wrote. “This is an activity best suited for underwriters who use the identifiers to sell the bonds.”
Gaffney said the MSRB should be aware of the time and cost burdens MAs would face if the proposal were to be approved.
Norwood wrote that there is currently a regulatory imbalance between dealers and MAs because of the existing CUSIP requirements and that the MSRB’s proposal to include non-dealer MAs is “an opportunity to level the regulatory playing field.”
She added that SIFMA understands the concern about non-dealer MAs possibly acting as dealers under the proposed requirements and asked that the SEC confirm that such activity in this context would not constitute dealer activity.
The Bond Buyer
By Jack Casey
07/03/17 07:07 PM EDT
SIFMA provided comments to the Securities and Exchange Commission (SEC) on the Municipal Securities Rulemaking Board’s (MSRB) proposed rule filing SR-MSRB-2017-03, which would amend MSRB Rule G-26, on customer account transfers. SIFMA incorporates by reference our prior comment letter to the MSRB as part of this proceeding, and specifically request that the SEC consider the issues raised in that letter as part of its consideration of the Proposal. SIFMA and its members strongly urge you to disapprove the proposed rule change in its current form.
The BDA submitted a comment letter to the MSRB in response to their second request for comment seeking industry input on draft rule amendments to MSRB Rule G-34, on CUSIP numbers, new issue, and market information requirements. You can find our final comment letter here.
BDA’s comment letter addresses the following:
Background on updated proposed amendments:
You can find BDA’s letter to the MSRB for the original proposed amendments here.
Bond Dealers of America
June 29, 2017
WASHINGTON – The Municipal Securities Rulemaking Board has released a compliance advisory for municipal advisors that details rules applicable to MAs and provides examples of potential violations.
The document, released on Thursday, follows the board’s announcement of its new strategic goals, which include an organizational shift toward assisting regulated entities with their compliance efforts.
The MSRB said that goal prioritizes initiatives like issuing regulatory guidance and advisories to support compliance with its rules. The board said it issued the MA compliance document “to aid advisor firms with understanding recently implemented MSRB rules and identifying potential compliance risks.”
“This advisory is designed to aid municipal advisors in the process of establishing, maintaining, reviewing, testing and modifying written compliance policies and supervisory procedures,” the MSRB said in the advisory. “The MSRB engages in an ongoing dialogue with municipal market participants through outreach events and education activities so that the compliance resources it prepares are appropriately tailored and responsive to market needs.”
The MSRB also said the guidance is intended for general information purposes only and included links in each section to give MAs the ability to access more information about the rules.
One rule the guidance covers is MSRB Rule G-42 on core duties of municipal advisors. Rule G-42 applies to MAs engaging in municipal advisory activities other than the solicitation of municipal entities or obligated persons on behalf of certain third parties. The rule subjects MAs to a duty of care and a duty of loyalty.
The duty of loyalty, among other things, requires that an MA deal honestly with the municipal entity client and with the utmost good faith. It also requires an MA act in the best interest of its municipal entity client without regard to self-interest. The duty of care covers requirements like ensuring the MA possesses the degree of knowledge and expertise needed to provide a municipal entity client with informed advice.
One violation of the rule can occur if the MA fails to inform their municipal entity client that the underwriter the MA is recommending has agreed to recommend the MA for services on another transaction it is underwriting. If an MA tells its client that it has chosen to limit the scope of the due diligence it will undertake to identify any conflicts of interest that may need to be disclosed, the MA would also be in violation of the rule.
The MSRB recommends, among other things, that MAs assess how they are ensuring their professionals are adhering to the rule as well as how well it is structuring client agreements and detailing the responsibilities of each party.
The board also included considerations for MAs associated with its Rules G-37 on political contributions and G-20 on gifts and gratuities.
G-37 is designed to address pay-to-play practices in the market and generally prohibits MAs from engaging in advisory business with a municipal entity within two years of certain contributions to an official of such municipal entity. The MSRB said a failure to track payments made by MA professionals at fundraising events and failures to submit required quarterly disclosure filings to the board could count as violative conduct.
Rule G-20 generally prohibits an MA from giving any item or service of value in excess of $100 per year, in aggregate, to any recipient if the gift or service is in relation to the municipal securities or MA activities of the recipient’s employer. A failure to review regular business expenses to gauge the frequency of gifts of meals or entertainment hosted by the firm could lead to potentially violative conduct, the MSRB said.
The board included considerations and possibly violative conduct in relation to rules that ensure MA firms and professionals are properly qualified as well as rules that firms have appropriate compliance programs and properly maintain their books and records.
The Bond Buyer
By Jack Casey
Published June 29 2017, 2∶42pm EDT
Just a few weeks ago, the Municipal Securities Rulemaking Board (MSRB) announced new strategic goals that include an organizational shift to assisting regulated entities with their compliance efforts. This goal prioritizes such initiatives as issuing regulatory guidance and advisories to support compliance with MSRB rules.
The MSRB is providing this Compliance Advisory for Municipal Advisors to aid municipal advisor firms with understanding recently implemented MSRB rules and identifying potential compliance risks. The advisory addresses applicable MSRB rules implemented since the publication of the MSRB’s first compliance advisory for municipal advisors.
This updated advisory describes factors a municipal advisor firm should consider when evaluating the effectiveness of its compliance controls and the need to implement measures to mitigate its exposure to compliance risks. Proactively addressing compliance risks benefits municipal advisors, their municipal entity and obligated person clients and, ultimately, investors and public confidence in the municipal securities market.
We look forward to your participation and feedback during the webinar and on an ongoing basis to help ensure our future compliance resources are appropriately tailored and responsive to market needs. We plan to publish a compliance advisory for municipal securities dealers soon. The next annual Compliance Advisory for Municipal Advisors, as well as one for municipal securities dealers, will be published in early 2018.
For additional compliance resources, municipal advisors are encouraged to visit the MSRB’s website (www.msrb.org).
(Reuters) – The U.S. Securities and Exchange Commission may take action against bankers from Barclays Plc and Morgan Stanley for their roles in Puerto Rico bond sales, according to filings with the Financial Industry Regulatory Authority (FINRA).
According to records filed with FINRA, the SEC’s staff has recommended the agency file an enforcement action against Barclays’ Luis Alfaro and James Henn for alleged violation of fair dealing rules for their roles in the island’s debt sales.
The SEC staff suggested that Henn, who has worked at Barclays since 2008, and Alfaro, who worked at First Bank Puerto Rico Securities before moving to Barclays in 2013, allegedly violated securities and municipal bond rules on fraud, deception and misrepresentation during the sale of Puerto Rico bonds.
The SEC staff also suggested sanctioning Morgan Stanley’s Charles Visconsi, the co-head of public finance, and his former colleague Jorge Irizarry, in connection with disclosures Puerto Rico made in documents circulated to investors, according to FINRA records.
Barclays, Morgan Stanley and the SEC were not immediately available for comment. Reuters could not obtain contact information for Alfaro, Henn and Visconsi.
Bloomberg earlier reported on the allegations on the bankers.
Puerto Rico’s financial oversight board said on Wednesday that it was still in debt restructuring talks with creditors of the island’s power utility, PREPA, a day after rejecting a proposed deal to restructure $9 billion of the utility’s bonds.
By REUTERS
JUNE 28, 2017, 9:33 P.M. E.D.T.
(Reporting by Parikshit Mishra in Bengaluru and Lisa Lambert in Washington; Additional reporting by Kanishka Singh in Bengaluru; Editing by Andrew Hay and Leslie Adler)
In a recent memorandum, Cadwalader attorneys Jason Halper, Jodi Avergun, Joe Moreno, Lex Urban, Kendra Wharton and Aaron Buchman posited that the “Financial CHOICE Act of 2017” (the “CHOICE Act”) could alter SEC enforcement strategies and procedures significantly. The CHOICE Act would make several changes to the current SEC practice of using in-house administrative proceedings rather than federal district courts for enforcement actions. The CHOICE Act would, among other things, (i) reform investigations by (a) establishing an “Enforcement Ombudsman,” (b) revising Wells notice procedures and (c) imposing further requirements for pre-enforcement analyses and evaluations, (ii) give respondents the choice between terminating SEC administrative proceedings and forcing the SEC to pursue action in federal court, or continuing administrative proceedings with the benefit of a higher “clear and convincing” burden of proof, (iii) strip Administrative Law Judges of the authority to issue barring orders, and (iv) require the SEC to announce and adopt any legal theory it would pursue through full notice-and-comment rulemaking before imposing that theory through an enforcement action.
Last Updated: June 22 2017
Cadwalader, Wickersham & Taft LLP
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
In our fast-moving society, yesterday’s exciting innovations are today’s antiquated has-beens. Every industry faces pressures to evolve in response to a rapidly changing political, economic and technological environment. Our brand-new smartphones become relics days out of the box, our state-of-the-art kitchens look dated within the decade, and yes, our long-standing regulations can risk hindering rather than advancing the fairness and efficiency of the municipal securities market.
But when it’s time to remodel the kitchen, step back before swinging a sledgehammer. While some features are destined for the scrap heap, others stand the test of time and deserve preservation. The Municipal Securities Rulemaking Board (MSRB) takes a methodical, participatory approach to keeping its regulations for municipal securities dealers and municipal advisors up-to-date.
One of the major advantages of the MSRB’s structure as a self-regulatory organization is having experienced cooks in the regulatory kitchen. The MSRB’s regulatory activities are informed by the insight of participants in the municipal securities marketplace who serve on the Board of Directors. An incoming class of new members joins the Board each year, ensuring that the MSRB receives fresh input on the practical realities of its rules from professionals who embody the diverse perspectives and activities of broker-dealers, banks, municipal advisors, municipal bond issuers, investors and others. Board member input is one of the most important ways the MSRB considers, on an ongoing basis, the need for review of certain industry practices or changes to existing rules.
When the MSRB identifies the need to further draw on the expertise and perspectives of market participants, it rallies a “kitchen cabinet” in the form of ad hoc advisory boards or committees to advise on topics of market interest. For example, the MSRB has convened an Investor Advisory Group to ensure our investor protection proposals, such as potential changes to MSRB rules on primary offering practices, are informed at the earliest point of consideration by input from investors in municipal bonds.
For kitchen remodelers, construction plans must be vetted by everyone who will use the revamped space. So too with the MSRB’s plans to update or modernize its existing rules. The MSRB may issue a concept release to solicit insight from market participants and other interested parties on the underlying issue, including possible alternatives to rulemaking. If rulemaking is pursued, the MSRB generally publishes a request for comment so that the public and regulated entities can provide input on the proposed rulemaking. The MSRB’s policy on the use of economic analysis in rulemaking ensures that available data and information on any anticipated burdens of implementation are considered at the earliest stage of the rulemaking process.
It is the policy of the MSRB to regularly consider and evaluate its rules retrospectively and propose amendments as appropriate and consistent with the public interest. As anyone who has tackled a kitchen remodel can attest, these projects can impact the rest of the house. Taking a hard look at a specific regulation in the MSRB’s rule book of roughly 45 standard-setting rules inevitably prompts consideration of other related rules. MSRB rules are helpfully categorized by their intent to foster fair practice, uniform practice, market transparency, professional qualification or operational standards. When one rule within a category is identified as in need of updating, other rules within that category also receive scrutiny. To further support retrospective rule review, the MSRB solicits public input on the entirety of its rule book and body of interpretive guidance, as it did in December 2012.
The MSRB does not close the door to input and conversation once updates to its regulations are adopted. Rather, we conduct extensive outreach to municipal securities dealers, municipal advisors, municipal entities, investors and fellow regulators on a regular basis to solicit feedback that informs the MSRB’s policy initiatives. MSRB Board members and staff frequently participate in industry events around the country and engage regularly with industry trade associations, issuer associations, investor representatives and other stakeholders. The MSRB’s outreach initiatives often lead to the development of interpretive guidance or compliance resources that help facilitate understanding of MSRB rules as they evolve.
Market feedback received throughout the year is synthesized and incorporated into the MSRB’s formal strategic and operating planning processes. Periodically, the Board meets in a dedicated strategy session to review the MSRB’s strategic direction and goals, which it did most recently in January 2017. These planning sessions are also informed by market conditions and relevant priorities of policymakers. The MSRB’s strategic goals guide the development of the annual operating plans that prioritize activities the MSRB will undertake in any given year to best serve its mission. This process includes identifying MSRB rules that are candidates for amendment, consolidation, streamlining or deletion in the interest of achieving greater efficiency, effectiveness or alignment with current behaviors and conditions in the municipal market. For example, the MSRB last year made two sets of amendments to its uniform practice rules, to modernize close-out procedures for municipal securities and to pave the way for the industry-wide transition to a two-day settlement cycle.
The MSRB recognizes that to be effective and best fulfill its mission, its rules must be responsive to changes in the municipal securities market and broader landscape. Our self-regulatory structure, participatory processes and commitment to stakeholder engagement support the MSRB’s ongoing efforts to create and maintain efficient and effective municipal market regulations. The MSRB welcomes industry and public feedback and pledges our continued focus on rule maintenance and modernization.
by Lynnette Kelly
June 26 2017, 10:16am EDT
The Bond Buyer
The Municipal Securities Rulemaking Board (MSRB) filed with the Securities Exchange Commission (SEC) proposed amendments to MSRB Rule G-21(e) related to municipal fund security product advertisements. The MSRB is proposing amendments to Rule G-21(e) to address important regulatory developments and to enhance protections for investors in municipal fund securities. The proposed amendments reflect changes to SEC rules governing money market fund advertisements and improve regulatory consistency of disclosure requirements for those municipal fund securities that invest in money market funds. View the filing.
The MSRB originally proposed these amendments as part of a broader request for comment on updating and harmonizing certain provisions of its municipal securities dealer advertising rule and establishing similar advertising regulations for municipal advisors. The MSRB continues to consider comments received from market participants on the other aspects of its proposal.
WASHINGTON – As the deadline for municipal advisors to pass their qualification exam approaches, roughly 26% of registered firms have no advisors who have qualified, potentially leaving issuers with fewer firms on which to rely, according to regulators.
Those firms have until Sept. 12 to either have an advisor pass the Series 50 exam or get out of the business.
The Bond Buyer
By Jack Casey
Published June 19 2017, 12∶48pm EDT
The Municipal Securities Rulemaking Board (MSRB) reminds regulated entities, which include brokers, dealers, municipal securities dealers and municipal advisors, of the October 13, 2017 effective date for amendments to rules related to customer and municipal advisory client complaints. Read the January 18, 2017 approval notice for amendments to MSRB Rules G-10, G-8 and G-9.
The amendments require, in part, that regulated entities keep an electronic complaint log of all written complaints of customers or municipal advisory clients using a standard set of product and problem codes. The MSRB Rule G-8 Customer and Municipal Advisory Client Complaint Problem and Product Codes Guide is now available.
The MSRB, in coordination with FINRA in the interest of consistency for those regulated entities that are also FINRA members, developed codes for the electronic complaint log required by Rule G-8 based on product and problem codes required by FINRA Rule 4530, but tailored to address municipal securities and municipal advisory activities. FINRA, in coordination with the MSRB, incorporates in its Rule 4530 product and problem codes explanations relating to municipal securities and municipal advisory activities, and includes Problem Code 15, Municipal Advisor Conflict of Interest, to address allegations relating to municipal advisor conflicts of interest.
The MSRB will host an educational webinar about the amendments to Rules G-10, G-8 and G-9 on Thursday, July 13, 2017 at 3:00 p.m. ET. Register here.
The NFMA Disclosure Committee released the Recommended Best Practices in Disclosure for Local Government General Obligation Debt, draft dated June 22, 2017.
Comments will be taken through September 30, 2017, after which a final version will be prepared.
To view the paper, click here.
Washington, DC – The Municipal Securities Rulemaking Board (MSRB) today articulated updated strategic goals that will guide the organization for the next several years and emphasize the importance of data, information and education in effective regulation of the municipal securities market.
“We are emerging from an intense period of rulemaking driven in part by the imperatives of the Dodd-Frank Act and the 2012 Securities and Exchange Commission Report on the Municipal Securities Market,” said MSRB Executive Director Lynnette Kelly. “It’s an appropriate time for the MSRB to shift our focus and assist regulated entities with their compliance efforts. Our updated goals prioritize initiatives such as issuing guidance, advisories and FAQs that will support that endeavor.”
The MSRB’s 2017 strategic goals also include expanding the utility of its Electronic Municipal Market Access (EMMA®) website to provide widespread access to municipal market data and tools that support fair transactions and facilitate decision-making, and maximizing the use of data to support market transparency and regulation. Additionally, the MSRB will conduct a comprehensive analysis of relevant market data to maximize its availability, utility and quality for the benefit of all market stakeholders and the public.
A fourth strategic goal focuses on the MSRB’s status as a self-regulatory organization, which ensures regulatory activities benefit from the insight of participants in the municipal securities marketplace. The MSRB plans to leverage the expertise inherent in the self-regulatory organization model to advance the integrity and efficiency of the municipal securities market.
The final strategic goal addresses financial stewardship. To carry out its Congressionally mandated mission, the MSRB must have financial stability and sustainability, and maintain sufficient reserves to operate without interruption, regardless of market conditions. The MSRB is committed to promoting financial sustainability by assessing fair and equitable fees, diversifying funding sources and spending responsibly.
The MSRB Board of Directors established the strategic goals after engaging in a long-term planning effort that included soliciting input from stakeholders, assessing changes in the market and considering the political, economic and technological environment. “These strategic priorities represent the interests of our stakeholders and a continued path to a fair and efficient municipal securities market,” Kelly said.
The MSRB’s updated strategic goals are:
More information about the goals is available here.
Date: June 19, 2017
Contact: Jennifer A. Galloway, Chief Communications Officer
202-838-1500
jgalloway@msrb.org
The Municipal Securities Rulemaking Board (MSRB) reminds regulated entities, which include brokers, dealers, municipal securities dealers and municipal advisors, of the October 13, 2017 effective date for amendments to rules related to customer and municipal advisory client complaints. Read the January 18, 2017 approval notice for amendments to MSRB Rules G-10, G-8 and G-9. The amendments require, in part, that regulated entities keep an electronic complaint log of all written complaints of customers or municipal advisory clients using a standard set of product and problem codes. The MSRB Rule G-8 Customer and Municipal Advisory Client Complaint Problem and Product Codes Guide is now available.
The MSRB, in coordination with FINRA in the interest of consistency for those regulated entities that are also FINRA members, developed codes for the electronic complaint log required by Rule G-8 based on product and problem codes required by FINRA Rule 4530, but tailored to address municipal securities and municipal advisory activities. FINRA, in coordination with the MSRB, incorporates in its Rule 4530 product and problem codes explanations relating to municipal securities and municipal advisory activities, and includes Problem Code 15, Municipal Advisor Conflict of Interest, to address allegations relating to municipal advisor conflicts of interest.
The MSRB will host an educational webinar about the amendments to Rules G-10, G-8 and G-9 on Thursday, July 13, 2017 at 3:00 p.m. ET. Register here.