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
Later this week, after months of debate and compromise, the Senate passed a $1 trillion-dollar bipartisan infrastructure package that includes nearly $600 billion in new spending. The bill is an amended version of the INVEST in America Act which replenishes the nearly depleted Highway Trustfund, setting up a September fight to get the package through the House prior to the Highway Trustfund running out of funding on September 30th.
While the American Infrastructure Bond amendment, which would create a new direct-pay bond with a flat 28% reimbursement rate, did not receive a vote during the prolonged debate, the package includes multiple bond financing provisions that expand the usage of PABs, including:
- The Rural Broadband Financing Flexibility Act (S.1676) is the template for adding broadband as an allowable use for private activity bonds (PABs). This would allow states to issue PABs to finance broadband deployment, specifically for projects in rural areas where a majority of households do not have access to broadband.
- Carbon Capture Improvement Act (S. 1829) allows carbon capture and direct air capture (DAC) technologies to be eligible for PAB financing. Private activity bond financing encourages commercial deployment, which is essential for bringing costs down and developing these technologies to scale. These bonds would be outside the volume cap.
- The bill increases the current cap of tax-exempt highway or surface freight transfer facility bonds from $15 billion to $30 billion as proposed by the bipartisan BUILD Act (S.881). Currently, $14,989,529,000 billion of the $15 billion caps has been issued or allocated. Increasing the cap will allow state and local governments to enter into additional public-private partnerships to supplement future surface transportation projects with private investment.
Budget Reconciliation–Additional Opportunities for Munis
Later today Senate Budget Chairman Bernie Sanders (I-VT) is expected to release the $3.5 trillion dollar budget outline, setting up the next infrastructure fight for later this fall in the House. The Senate is expected to pass the bare budget outline this week prior to adjuring for August recess, without policy detail included. This package will provide additional opportunities for the passage of key muni priorities.
The MBFA and BDA have learned through conversations with senior Administration staff and key Capitol Hill contacts that muni provisions remain a priority for Congressional tax writers as Democrats eye the next spending opportunity this fall.
These muni provisions under consideration include:
- The restoration of tax-exempt advance refundings;
- Raising the BQ limit; and
- The direct-pay American Infrastructure Bond.
FINRA 4210 Amendments
FINRA Rule 4210 governs customer margin requirements. FINRA has had a multi-year project to amend Rule 4210 to apply margin requirements to trades with extended settlements even for DVP accounts. Among other issues BDA has raised around 4210, we requested that dealers be permitted to take a capital charge in lieu of customers posting margin for certain extended settlement trades.
In recent months FINRA has issued two proposals regarding Rule 4210. The first, a concept release, would apply margin requirements to when-issues transactions that settle outside normal settlement windows. The second focused on “covered agency transactions,” or new issues of agency-backed MBS was issued by the SEC as a rule proposal. BDA commented on both. We told FINRA that the Rule under both proposals would severely disadvantage regional and middle-market firms. We asked FINRA to revise the Rule so that, for example, margin requirements would not apply as long as an MBS trade is settled by the published good delivery date. We have also had follow-on meetings with FINRA and SEC staff. FINRA’s proposals both indicated that the current October 2021 compliance deadline will be extended yet again.
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 syndicate receivables cannot count towards regulatory capital compliance. So co-managers’ funds are locked up for 90 days after deal closing until the syndicate account is closed.
BDA and a group of CEOs of minority-, women-, and veteran-owned firms recently met with SEC Chair Gary Gensler on the issue, and Chair Gensler indicated his support for reducing the 90-day deadline of the FINRA rule. We subsequently spoke with FINRA staff who indicated that they are preparing a concept release with a proposal to amend Rule 11880 to reduce the deadline for returning funds from 90 days to 30. A second meeting with FINRA staff focused on the issue is on the calendar.
SEC Rule 15c2-11
In late 2020 the SEC finalized changes to SEC Rule 15c2-11 as it relates to pre-trade issuer information. The Rule requires dealers to review issuer financial information prior to submitting quotes to trading platforms for over-the-counter securities. The 2020 changes specify that the issuer financial information must also be publicly accessible.
Rule 15c2-11 has existed for some time. Many have assumed that the rule does not apply to fixed-income products. But in its release announcing the changes last year, the SEC specified that the rule does apply to fixed income products except for municipals.
BDA met with SEC staff in the spring about a blanket exemption from Rule 15c2-11 for fixed income products, and we sent a draft exemptive relief request to the staff of the SEC Division of Trading and Markets. Subsequent to that, the SEC informed us that SIFMA is pursuing a similar exemptive relief request and asked the two organizations to combine efforts. Based on that request, BDA and SIFMA had a series of meetings with four of the five SEC commissioners on Rule 15c2-11 and recently sent a draft joint exemptive relief request to the staff of the SEC’s Division of Trading and Markets. A follow-up meeting is on the calendar.
MSRB Rule G-13 Enforcement
FINRA recently released a settlement letter for enforcement action against a firm for violating MSRB Rule G-13. The case represents new enforcement ground. We are not aware of any FINRA enforcement case involving Rule G-13 since FINRA has existed in its current form. The MSRB has issued little guidance around G-13. We are concerned that this case could represent a new focus for FINRA in examinations and enforcement. If that’s true, we believe the industry will need additional guidance from the regulators around what constitutes a violation.
BDA has hosted numerous member calls on G-13 enforcement issues which have allowed firms to share information on compliance practices. We also sought and received informal clarification from MSRB staff on open questions regarding the scope of G-13 enforcement. We are now conducting a survey of member firms on their compliance practices around the Rule as a guide for firms creating or amending G-13 compliance procedures.
MSRB Rule G-10
BDA recently submitted a comment letter on proposed changes to MSRB Rule G-10. Rule G-10 requires municipal securities dealers to make certain annual disclosures about their SEC and MSRB registrations and about the MSRB’s complaint resolution services. In our January 2021 letter to the MSRB on strategic priorities, BDA asked the MSRB to amend Rule G-10 so that dealers would be required to send municipal-related disclosures only to their municipal customers.
The MSRB’s proposed changes to Rule G-10 would implement BDA’s recommendations. The proposal would also exempt Sophisticated Municipal Market Professionals from the disclosure requirement if the disclosure information is posted on the dealer’s Web site. In our comment to the MSRB, BDA generally supported the amendments and requested additional changes to Rule G-10.
Since we sent our letter, the MSRB has transmitted to the SEC a formal proposed change to Rule G-10 that incorporates many of our recommendations.