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.
Response to COVID-19 Pandemic
The BDA continues to lead the industry response to the economic turmoil resulting from the COVID-19 outbreak. The BDA has remained in contact with policy makers and leaders at the Federal Reserve, Treasury, and Capitol Hill and other agencies throughout this event, and continues to take steps to strengthen the municipal and corporate markets working in lock step with membership.
The BDA has:
- Guided the Fed in the development of the Municipal Liquidity Facility
- Successfully advocated to Members of Congress to support muni market provisions in the CARES Act;
- With support of the issuer community, succeeded in requesting the Fed to proactively expand the Money Mutual Find Liquidity Facility to include VRDN’s and bank certificates of deposit and expand the Commercial Paper Funding Facility to include municipal CP;
- Provided opportunities for member discussions with regulators regarding best ex and problems that have arisen from crisis;
- Submitted a recommendation calling on the Fed to develop a Municipal Note Guarantee;
- Called on Congress to Act swiftly to included infrastructure in “phase 4” stimulus, including BDA priorities such as AR, BQ Debt, and PAB expansion
- Worked with Members of both the House and Senate to advance municipal bond priorities in infrastructure package
SEC Request for Comment on Proposed Exemptive Relief for MA’s
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. Recently, the SEC announced that they will proceed with a temporary and limited exemptive order that will expire on December 3, 2020. While the BDA opposes any relief, and plans to advocate in favor of the order expiring at the end of the year, the SEC followed BDA suggestions in vastly limited the order and clarifying if MA’s go beyond what is allowed in order it is illegal activity.
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 the SEC and asked them to withdraw the order, and if the SEC continues to go forward, they should follow the American Procedures Act and conduct rulemaking rather than exemptive relief, 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.
Stimulus, Infrastructure and Municipal Bonds
The BDA continues to press for a stimulus package that features an infrastructure component to further embolden the municipal bond market. In January, 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 and the expansion of PABs,
- Raising the limit on Bank Qualified bonds, 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 has continued advocacy for inclusion of these fixed-income priorities into any infrastructure package. Recently the House introduced the Moving America Forward Act that features all BDA legislative priorities. The BDA continues to support the House in their efforts to advance the package and working to find Senators to support introduction of similar measures.
Municipal Advisor Rule
The BDA is exploring the prospect of pressing the SEC to amend the 2013 municipal advisor rule so that entities would become MAs only when actually engaged by an issuer, not simply by providing advice.
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.
While the SEC delayed implantation of some Rules in response to the COVID-19 pandemic, this month they announced that the June enforcement date for Reg BI remains intact.
In response, 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 and will host a BDA member-wide call with representatives from all 3 regulatory bodies on April 29th.
The BDA continues to advocate on Rule 15c2-12 to the SEC Office of Municipal Securities. Working with the Legal and Compliance Committee. 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.
The BDA is active in 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.
FINRA 4210 Amendments
FINRA Rule 4210 (Margin Requirements) describes the margin requirements that determine the amount 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 to 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.
BDA members proposed the “capital charge” in a meeting with FINRA CEO Robert Cook in December 2017 and continued to advocate for the idea with comment letters and member fly-ins throughout 2018. The BDA partnered with senior leaders on the House Financial Services Committee and Senate Banking Committee to pressure the SEC and FINRA to rethink the rule, both advocating for the “capital charge” proposal as well for outright termination of the amendments.
As a result of BDA member outreach and advocacy efforts, FINRA and the SEC have delayed the implementation date of amendments to Rule 4210 multiple times, and the BDA continues to press for inclusion of the “capital charge in lieu of margin” proposal.
Retail Confirmation Mark-up Disclosure Rules
Due to the burdensome requirements and tight timetable of the mark-up rules, BDA member firms authored a “conformance period,” business plan, which was presented to the SEC, FINRA and the MSRB in the spring of 2018.
Under the BDA-authored plan, the mark-up rules 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. Despite opposition from various trade groups, including the BDA, in late April 2018, the SEC denied the “conformance period” proposal the rules became effective on May 14, 2018.
MSRB Rule for Municipal Advisors/Update Dealer Standards on Advertising
In May 2018, the SEC approved the MSRB’s proposed Rule G-40, on advertising by municipal advisors, and amendments to MSRB Rule G-21, on advertising by municipal securities dealers. New MSRB Rule G-40 and amended Rule G-21 are set to be effective on February 7, 2019.
Since May 2018, the MSRB has issued several requests for public comment related to the application of Rule G-40. Most recently in September 2018, the MSRB issued final guidance on its frequently asked questions (FAQs) regarding the use of municipal advisory client lists and case studies under Rule G-40. The final FAQs included clarifications requested by the BDA in our comment letter.
The BDA will continue to respond to all of the MSRB’s requests for comment concerning interpretative guidance and compliance resources related to Rule G-40 and Rule G-21.
The BDA is actively engaging with membership and policymakers as the Trump Administration and Congress look at reforming Fannie Mae and Freddie Mac. The Senate Banking Committee, led by Chairman Mike Crapo (R-ID), has examined GSE reform in hearings in March 2019, and President Trump has directed federal agencies to report to him on how to end the conservatorship the GSEs are currently under.
The BDA has presented a White Paper” to policy makers laying out potential reform framework. In June 2020, the FHFA announced it will be following one of BDA recommendations, the capital proposal for Fannie and Freddie.