The Bond Dealers of America (BDA) deploys a variety of advocacy and grassroots tools to influence the policy-making process and promote a more efficient fixed-income market. Regulatory authorities in Washington, D.C. recognize the BDA as an authority on technical issues and market trends. Through a variety of events and forums, our members have the opportunity to meet regulators and legislators to discuss market and business challenges. Our federal Political Action Committee (PAC) supports legislators who work to advance policies that improve the fixed income markets.
Infrastructure and Municipal Bonds
The BDA and MBFA continue to press for an infrastructure package that further emboldens the municipal bond market.
Senator Roger Wicker (R-MS) and Debbie Stabenow (D-MI) introduced legislation that would reinstate tax-exempt advance refundings and their House counterparts Reps. Dutch Ruppersberger (D-MD) and Steve Stivers (R-OH).
The bills have strong bipartisan support and are well-positioned for debate as Congress turns its attention to infrastructure and public works later this year.
In late March, the BDA Board hosted House Ways and Means Chairman Richard Neal (D-MA) for a virtual infrastructure roundtable in which the reinstatement of AR was discussed at length, among other municipal bond priorities including:
- Expansion of PABs including for ESG uses;
- Raising the BQ debt limit; and
- Reinstatement of direct-pay bonds exempt from sequestration.
The newly reformed Municipal Bonds for America Council has also been active in promoting muni priorities. Following the early March Ways and Means hearing titled, “Tax Tools to Help Local Governments,” the MBFA submitted testimony in support of the municipal market.
The BDA and MBFA continue to work with our partners on Capitol Hill and in the Public Finance Network (PFN) to ensure that municipal bond provisions are well placed and considered as Congress works on additional 2021 measures such as infrastructure and public works which we believe will be addressed in the coming months.
Last year BDA submitted a short paper to FINRA and the MSRB on regulatory and compliance issues arising from the pandemic and remote work. Since then FINRA has issued a formal request for comment on lessons learned from the pandemic and issues related to remote work, and BDA submitted comments in response to FINRA Notice 20-42 (remote work).
FINRA 4210 Amendments
FINRA Rule 4210 (Margin Requirements) are the margin requirements that determine the number of collateral customers are expected to maintain in their margin accounts, including both strategy-based margin accounts and portfolio margin accounts. The BDA believes that the amendments are anti-competitive for smaller and mid-size broker-dealers and believe that FINRA should revise the amendments to allow dealers to either charge margin or to take a “capital charge in lieu of margin” on certain transactions.
Following multiple BDA proposals and recommendations, FINRA recently announced that they seek to comment on proposed amendments to Rule 4210 (Margin Requirements) that would clarify and incorporate into the rule current interpretations regarding when issued and other extended settlement transactions, and provide relief to facilitate the application of the rule to these transactions.
The BDA will host a call in the coming weeks to work on draft comments with membership. Comments are due May 14, 2021
Corporate Syndicate Rule
BDA is pursuing a change in regulation to address a mismatch between the SEC Net Capital Rule and FINRA Rule 11880 which governs the settlement of syndicate accounts on corporate bond and equity issuances. FINRA rules allow syndicate leads managers 90 days after deal closing to close syndicate accounts and return funds to co-managers. However, the SEC capital rule specifies that receivables older than 30 days cannot count towards regulatory capital compliance. So co-managers’ funds are locked up for the final 60 of the 90 days until the syndicate account is closed.
In late 2019, the BDA wrote FINRA calling to amend FINRA Uniform Practice Code Rule 11880 (“Rule 11880”) to reduce the maximum time to settle syndicate accounts from the current 90 days. The BDA believes reducing the time to settle syndicate accounts would streamline the corporate bond and equity issuance process and reduce counterparty credit risk. Alternatively, an industry best practice recommending that lead managers return the majority of co-managers’ funds within 30 days and the rest within 90 days could be a solution.
Additionally, the MSRB amended its Rule G-11 governing underwriting syndicates in 2009, reducing the time to settle a syndicate from 90 days after closing to 30.
Since our letter to FINRA, we have had continuing conversations with FINRA and SEC staff on this issue. We continue to discuss three possible solutions: amending the FINRA syndicate closing rule, amending or obtaining clarifying guidance on the SEC net capital rule, or working with the industry more broadly to develop a best practice that would mitigate the capital issue for co-mangers.
Temporary Conditional Exemption for MA’s on Private Placements
The Temporary Conditional Exemption issued by the SEC in June which permitted non-dealer Municipal Advisors to solicit investors in certain bank placement transactions expired at the end of 2020. The BDA lobbied the SEC for two years to kill the broad 2019 proposed Exemptive Order and to let the temporary exemption expire at the end of the year as scheduled.
Following the SEC’s early summer announcement that they are proceeding with a limited and temporary version of exemptive relief for MA’s, the BDA responded immediately. As recently as November 30, 2020, BDA wrote the SEC arguing that the temporary exemption due to expire at the end of the year is unneeded and dangerous. BDA has filed numerous letters and conducted several meetings with the SEC on municipal private placement over the last 18 months.
BDA also partnered with multiple Members of Congress in opposition to the proposed exemptive order and the temporary exemption. Representative French Hill (R-AR), following advice from the BDA, pressed SEC Chairman Clayton on these problematic aspects, and the BDA continues to work with Congressman Hill on the next steps to be taken.
The BDA followed up with the SEC in December following hearings on Capitol Hill reiterating the request to allow the Exemption to expire at years end, and that request was granted. The BDA continues to remain vigilant on the issue and continues to work to ensure the Exemption is not revived including pursuing additional letters and support from Capitol Hill.
SEC Rule ATS
The SEC has released a significant proposed rule change to their Rule ATS. SEC Rule ATS creates a regulatory structure for certain alternative trading systems, including fixed income trading platforms. When the rule was adopted in 1998, the SEC exempted trading systems that support trading in government securities from the regulatory scheme. The SEC’s current proposal would repeal that exemption and apply Rule ATS to government securities trading systems. The release proposing the rule change also requests comments on the regulatory structure for platforms that support trading in municipal and corporate bonds. This inquiry arises from a 2018 recommendation from the SEC’s Fixed Income Market Structure Advisory Committee to review the rule with an eye towards equalizing the regulatory treatment of fixed income trading platforms with varying structures. BDA is preparing a comment letter in response.
The TRACE pilot program, as proposed by FINRA, was to review the impact of giving traders two full days before having to reveal the largest block trade transactions. BDA opposed the pilot program as BDA member firms believe the proposed 48-hour delay in disseminating trade information would introduce significant and damaging opacity to the market, disadvantage retail investors, and include no incentive for middle-market firms to increase their capital commitment or provision of liquidity. We learned last year that FINRA does not plan to act on the proposed pilot program. We also learned that the SEC’s Fixed Income Market Structure Advisory Committee may revisit the issue this year with an eye towards amending their recommendation.
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. BDA is drafting an appeal to the SEC to reopen the MA rule with the notion of revising the definition of an underwriter in the context of potential treatment as a MA.