Bond Dealers of America (BDA) deploys a variety of advocacy, educational, informational and grassroots tools to influence the policy-making process and promote a more efficient market. Regulatory authorities in Washington recognize us as an authority on technical issues and market trends. Through a variety of events and forums, our members have the opportunity to meet regulators, policymakers and legislators to discuss market and business challenges. Our federal Political Action Committee supports legislators who work to advance policies that improve the fixed income markets.
Regulatory Advocacy Issues
The BDA continues to engage Capitol Hill, FINRA and the SEC on next steps for FINRA Rule 4210. In 2018, the BDA met with SEC Chair Clayton and each SEC Commissioner in addition 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 and still manage any systemic risk. This proposal was discussed with Robert Cook and senior FINRA staff in February and April 2018.
As a result of BDA member outreach and advocacy efforts, FINRA and the SEC has delayed the implementation date of Rule 4210 to March 25, 2019. The BDA continues to press for inclusion of the capital charge proposal and is planning a meeting for BDA members to discuss this issue directly with FINRA staff in mid-May and June. Learn more here.
SEC Fixed Income Market Structure Committee
The BDA Taxable Committee continues to play an active role in the SEC Fixed Income Market Structure Committee. At the April meeting, FIMSAC recommended a pilot on TRACE-eligible corporate securities. The BDA Taxable Committee has been engaged and is monitoring the progress of the pilot program.
BDA members of the SEC’s Fixed Income Market Structure Advisory Committee (FIMSAC) include Horace Carter (Raymond James) was selected for the committee, as were BDA members Amar Kuchinad, (Trumid Financial) and Richard McVey (MarketAxess).
SEC Best Interest Standard/ DOL Fiduciary Duty
The BDA is engaged with SEC Commissioners and staff this spring on next steps and plans to further engage Capitol Hill as the SEC comment period opens this summer. In April 2018, the SEC voted to issue for public comment two proposed rules and an interpretation to address the ”fiduciary” rule/best interest standard. Comments are due on August 7, 2018. BDA will form a working group to draft comments to the SEC.
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. 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.
Retail Confirmation Mark-up Disclosure 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 rules 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. 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.
Following the meeting, the plan BDA presented to the SEC included 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 also met with the two new SEC commissioners, Hester Peirce and Robert Jackson, Jr., regarding the mark-up rules.
Despite opposition from various trade groups, in late April 2018, the SEC denied the conformance period proposal for retail confirmation mark-up disclosure rules and they will become effective on May 14, 2018.
However, both FINRA and MSRB have agreed to work with BDA members as they prepare to comply with the rules and leave the door open for an extended timeline without enforcement. Learn more here.
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.
BDA submitted comments in February 2018 to the SEC in response to the MSRB’s proposed new rule and met senior SEC staff in April 2018. BDA also submitted a joint letter with NAMA and SIFMA, requesting for the SEC to institute disapproval proceedings for the MSRB’s proposed amendments to Rule G-21 and new Rule G-40 until the MSRB further clarifies and addresses these key issues within the text of the rules themselves.
However, the SEC has approved MSRB’s proposed rule change and its effective date will be February 7, 2019. Prior to this date, the MSRB will provide guidance for municipal advisors relating to a municipal advisor’s use of case studies and municipal advisory client lists; Rule G-40’s content standards; and a municipal advisor’s use of social media. BDA plans to submit comments on what issues the MSRB should cover in the guidance.
FINRA Government Securities Initiative
The BDA submitted comments to FINRA on April 9, 2018 in response to a February 2018 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.
BDA Letter to the Treasury Department on Capital Markets Regulatory Reform
The Treasury Department is currently working on a series of policy papers examining the U.S. financial regulatory system, including U.S. capital markets regulation. In August 2017, the BDA submitted a letter to the Secretary of the Treasury, which highlighted concerns with U.S. broker-dealer industry consolidation and explained specific concerns with MSRB and FINRA retail confirmation rules and the mortgage margin amendments for FINRA Rule 4210. The Treasury report will be the first statement with policy specifics and recommendations related to the U.S. capital markets by the Trump Administration. Learn more here.
MSRB’s Minimum Denomination Rule Filing with the SEC
BDA submitted two comment letters to the MSRB stating that proposed MSRB Rule G-49 should be focused on issuances with ‘minimum authorized denominations’ of $100,000 or greater. The MSRB filed its minimum denomination rule with the SEC in February 2017, but later withdrew the proposal and stated that it would continue to work on amendments to the minimum denomination rule. In September 2017, the BDA will continue the discussion with the MSRB as it considers amendments to MSRB Rule G-15 and will advocate for regulatory alternatives to reduce regulatory burdens in the municipal securities market.
SEC’s Proposed Amendments to Rule 15c2-12
In February 2017, the SEC proposed two new amendments to Rule 15c2-12. The amendments propose to add two new events to the existing material events that would be required to be disclosed under an issuer or obligated persons continuing disclosure agreement. Specifically, the SEC proposes to add the incurrence of a material “financial obligation” or agreement to a material debt covenant or debt provision that would modify the priority rights of the issuers or obligated persons existing debt holders as a material event under 15c2-12. The BDA met with the SEC’s Office of Municipal Securities in June 2017 and discussed the policy concerns BDA raised in its comment letter.
Request for Comment on Draft Amendments to MSRB Rule G-34 (CUSIP Requirements)
BDA submitted a comment letter in March 2017 that disagreed with how the MSRB had fashioned its regulatory proposal. BDA stated that the MSRB should not craft a rule that requires CUSIP numbers in transactions where the issuer and purchasing investors do not want a CUSIP number and that a CUSIP number requirement will have substantial negative consequences for the market. Learn more here.
Legislative Advocacy Issues
Financial Reform Legislative Priorities
BDA will work with Congress and the Administration to advance regulatory reform legislation. This will include working to advance BDA’s advocacy priorities including requiring more stringent regulatory cost-benefit analyses, High Quality Liquid Asset legislation, amendments to the Department of Labor Fiduciary Duty Rule, revisiting the Municipal Advisor Rule, and more.
Promoting Tax-Exempt Municipal Bonds and Private Activity Bonds
The BDA has been building relationships with various state and local groups, coalitions, and trade associations to continue to advocate for the protection of tax-exempt municipal bonds and for expanded use of private-activity bonds during “Infrastructure Week 2018” as well as further BDA’s legislative priorities.
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. Most recently in April 2018, the BDA Municipal Bond Division Leadership provided the Senate Finance Committee with comments strongly urging them to expand the use of PABs. Learn more here.
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, the Municipal Bonds For America Coalition, 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 House Ways and Means Committee comments on “expired tax provisions” in March 2018, showing a wide variety of cost savings lost for state and local governments of all sizes.
Most recently, in April 2018, the BDA Municipal Bond Division Leadership provided the Senate Finance Committee with advance refunding project data for their hearing on “early impressions of the new tax law”.
Financial Regulatory Reform Legislation: High Quality Liquid Assets (HQLA) and the Volcker Rule
Working in tandem with state, local and issuer groups, the BDA has long-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 the Economic Growth, Regulatory Relief, and Consumer Protection Act, (S. 2155) which has passed the Senate and is now awaiting House action. S. 2155 would also exempt banking entities from the Volcker Rule if they have (and are not controlled by a company that has) less than $10 billion in total consolidated assets and total trading assets and trading liabilities that are not more than 5 percent of total consolidated assets.
In April 2018, House Financial Services Committee Chairman Jeb Hensarling (R-TX) stated that he would be open to passing the Senate’s Dodd-Frank reform bill, if the Senate considers a package of bipartisan capital formation bills approved by the House. President Trump supports S. 2155 and has expressed active interest in signing the bill into law before Memorial Day weekend. There is a strong possibility that that some version of a House and Senate compromise on financial regulatory reform legislation will move forward in Congress this year.
PCAOB Exemption Legislation
The BDA is working with other industry participants and trade groups on legislation that would exempt privately-held, non-custodial brokers and dealers, including BDA members, 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.
BDA has been meeting with members of the Senate Banking and House Financial Services Committees to introduce the legislation. Once it has been introduced, BDA plans to actively advocate for it on Capitol Hill.
Bank Qualified Bonds
BDA continues to support legislation to increase the annual volume limit for bank-qualified bonds from $10 Million to $30 million and to index for inflation. Past legislation has also allowed for the use of pooled financings and would calculate the volume cap at the issuer, rather than issuance, level. BDA has lobbied Congress extensively on the bank-qualified issue and we will continue to do so in the tax reform discussion into Fall 2017. Learn more here.
Additional BDA Priorities
FinCEN Customer Due Diligence
The BDA continues to work with membership on developing best practices for the CDD rule, which goes into effect this May. FinCEN is issuing final rules under the Bank Secrecy Act to clarify and strengthen customer due diligence requirements for: Banks; brokers or dealers in securities; mutual funds; and futures commission merchants and introducing brokers in commodities. The rules contain explicit customer due diligence requirements and include a new requirement to identify and verify the identity of beneficial owners of legal entity customers, subject to certain exclusions and exemptions.