The BDA continues lead the industry response to the PFM and NAMA requests for exemptive relief on private placements.
Since learning of the initial PFM letter and the follow up letter from NAMA to the SEC, the BDA has made this our top priority and taken many steps in order to combat the misinformation represented.
First and foremost, the BDA has pressed the SEC to dismiss this request in full and not grant any form of relief as requested by PFM and NAMA. However, after multiple meetings with SEC staff, all commissioners, and the Chairman and three letters to the SEC, and 3 letters submitted to the Commission, , it has been clear from the beginning that the SEC intends to move forward with some form of exemptive relief. While we outright oppose this request, it is very important the BDA is “at the table” to ensure any potential relief is a narrow as possible.
The BDA has also partnered with multiple Members of Congress in opposition to the proposed exemptive order. Representatives Hill (R-AR) and Kustoff(R-TN) both wrote asked to Commissioner to withdraw the order, however, if they continue to go forward, they should follow the American Procedures Act, resulting in a normalization of the process. The BDA continues to press for the Hill support, and in the coming weeks expects to see further correspondence from Congress.
Infrastructure and Municipal Bonds
The BDA continues to press for an infrastructure package that will further embolden the municipal bond market. Recently, the House of Representatives released an infrastructure principles document that included many BDA priorities. This includes:
- Ensuring that the tax-exempt state of municipal bonds is not altered,
- Pressing for the reinstatement of advance refundings, the expansion of PABs,
- Raising the limit on Bank Qualified debt, and
- Ensuring that BABs are untethered from sequestration if reimplemented.
In March, the BDA along with the PFN hosted a “Municipal Bonds 101” Roundtable on Capitol Hill, which attracted over 40 Congressional staffers and was kick-off by Congressman Steve Stivers (R-OH). The event focused on the recent House infrastructure release and featured a municipal bond educational segment for new Hill staff that may be unaware of the importance of bonds.
The BDA will continue to focus on growing relationships on both sides of the aisle on Capitol Hill, while also strengthen relationships with the issue community in an effort to promote legislation and continue to raise awareness on the importance of the tax-exemption.
Municipal Advisor Rule
The BDA is exploring the prospect of pressing the SEC to amend the 2013 municipal advisor rule. A strong case can be made that the SEC interpreted the statute too narrowly. The SEC has the statutory authority, for example, to exempt underwriting firms from treatment as a MA at the time the dealer discloses to the issuer that they are seeking business as an underwriter rather than when the firm is formally engaged.
The SEC rule arising from the DFA establishes a regulatory definition for who is subject to treatment as a municipal advisor. In writing the rule, the SEC took a very restrictive approach in defining “serving as an underwriter.” Under the SEC rule a firm is serving as an underwriter only when there is “a contractual ‘engagement’ by a municipal entity of a broker-dealer to serve as underwriter on a specific planned transaction.” As a result, a dealer does not qualify for the underwriter exemption unless the firm is formally engaged to provide underwriting services. Any advise provided to the issuer before the formal engagement, including typical conversations and pitches involving bankers and issuer officials, could trigger treatment as a MA unless the issuer meets one of three exemptions.
A strong case can be made that the SEC interpreted the statute too narrowly. The SEC has the statutory authority, for example, to exempt underwriting firms from treatment as a MA at the time the dealer discloses to the issuer that they are seeking business as an underwriter rather than when the firm is formally engaged.
BDA is considering an appeal to the SEC to reopen the MA rule with the notion of revising the definition of underwriter in the context of potential treatment as a MA.
Fixed Income Market Structure
Several of BDA’s members sit on the SEC’s Fixed Income Market Structure Advisory Committee (FIMSAC), including Brad Winges (Hilltop Securities), Amar Kuchinad,(Trumid Financial) and Richard McVey (MarketAxess).
Additionally, the BDA has formed its own Fixed Income Market Structure Working Group, which includes industry leaders at 26 BDA member firms. Brad Winges (Hilltop) serves as Chair. The working group’s first meeting was held on October 15, 2018, and first D.C. fly-in was held on June 17, 2019, and the group expects to continue engagement with federal policymakers as a “Main Street” thought leader on these important topics.
Regulation ‘Best Interest’
In June 2019, the SEC adopted the long-anticipated “Regulation Best Interest” to replace the previous “fiduciary rule.” Regulation Best Interest will enhance the broker-dealer standard of conduct beyond existing suitability obligations and make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer when making recommendations. The regulations will also require brokers to disclose potential conflicts of interest to their customers. “Regulation Best Interest” is considered much better for the industry than the “fiduciary rule” — which BDA and many others strongly opposed.
The BDA is keenly interested in how FINRA and MSRB suitability rules may change to better coordinate with the new SEC best interest rules. The BDA continues to work directly with membership developing questions for FINRA and SEC to answer regarding the Rule prior to the summer effective date.
The BDA continues to advocate on Rule 15c2-12 to the SEC Office of Municipal Securities. Working with the Legal and Compliance Committee, the BDA continues to encourage commissioners to update the Commission’s interpretative guidance that was last updated in 1994.
In recent weeks, the BDA has joined the Disclosure Industry Group (DIG), a working group of over 15 industry associations, lead by the Government Finance Officers Association, with the purpose of responding to and helping guide regulators in all disclosure actions. Following the recent publication of a staff legal bulletin on antifraud provisions, the BDA will continue to monitor all actions at the SEC as it is believed that that municipal disclosure will continue to be a focus of the SEC in 2020.