In the past few years of massive regulatory change, the BDA has remained focused on the highest priority issues impacting the U.S. fixed income markets and provided its members with valuable opportunities to engage directly with regulators. The BDA also provides its members with in-person access to key Capitol Hill policymakers on the Senate Finance Committee, the Senate Banking Committee, the House Financial Services Committee and the House Ways and Means Committee. The legislation developed by these committees directly impacts the fixed income markets.
Through a truly engaging partnership with hundreds of industry leaders at BDA member firms, below are the 2018 regulatory and legislative accomplishments of the BDA.
Thank you for your ongoing support.
2018 Regulatory Accomplishments
Revisions and Delay of Amendments to FINRA Rule 4210
The BDA believes that the 4210 amendments represent a regulatory overreach by FINRA. FINRA is using a broad statutory authority of the Securities and Exchange Act in an attempt to adopt a systemic risk rule, potentially violating congressional intent. The BDA also believes that the 4210 amendments are anti-competitive to BDA members.
In April 2018, FINRA asked the SEC to delay Rule 4210 amendments to March 2019, indicating that many market participants have requested that FINRA reconsider the potential impact of an amended Rule 4210 on smaller and medium-sized broker-dealers. The BDA and its members led the charge in the request of this delay.
Additionally, in late 2017, the BDA proposed a “capital charge in lieu of margin” to FINRA CEO Robert Cook. This proposal would allow dealers to remain competitive with money manager accounts and still manage any systemic risk.
The FINRA Board of Governors approved the BDA-led “capital charge in lieu of margin” revision, and other revisions, at their September 2018 board meeting. The 4210 revisions are currently in the process of being referred from FINRA to the SEC, and FINRA has indicated they will likely further delay the March 2019 deadline as well. BDA will provide updates as they become available. (The partial government shutdown is hindering the formal, regulatory communication process.)
Fixed Income Market Structure
The BDA plays an active role in the SEC Fixed Income Market Structure Committee. BDA members of the SEC’s Fixed Income Market Structure Advisory Committee (FIMSAC) include Horace Carter (Raymond James), Amar Kuchinad, (Trumid Financial), Richard McVey (MarketAxess) and Brad Winges (Hilltop Securities).
Additionally, the fall of 2018, the BDA established an internal Fixed Income Market Structure Working Group. The group met in October and December 2018 and is planning a full slate of meetings in 2019. The working groups brings together 20+ thought leaders across the industry, and will proactively get in front of federal policy and business decisions impacting the fixed income markets.
Also included in the Fixed Income Market Structure Working Group will be a subcommittee on municipal disclosures. It is widely expected that the SEC will take a deeper look into the practices and the BDA plans to use this group in order to take proactive measures in early 2019.
Retail Confirmation Mark-up Disclosure Rules
The BDA became aware in late 2017 that the SEC Chairman and commissioners were frustrated with industry calls for a flat delay of the rules, and quickly acted to set up BDA member meetings to best express our concerns to the chair and commissioners in-person.
In early 2018, at the urging of SEC Chairman and commissioners, the BDA led the charge and presented to the SEC a plan for a “conformance period,” in which the mark-up 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.
Despite opposition from various trade groups the SEC was not able to come to a consensus on delaying the rules, and the SEC denied the conformance period proposal. The rules became effective on May 14, 2018. The BDA is engaging with regulators (SEC, FINRA and MSRB) regarding compliance with the rules.
Primary Offering Practices
This fall, BDA submitted a letter in response to an MSRB request for comment on primary offering practices. In the letter, the BDA focused on G-11 Primary Offering Practices including free-to-trade wire and alignment of the time frame for the payment of group net sales credits with the payment of net designation sales credits. Also addressed was G-32 disclosures in connection with Primary Offerings including equal access to the disclosure of the CUSIP numbers refunded and the percentages and whether non-dealer Municipal Advisors should make the official statement available to the managing or sole underwriter after the issuer approves it for distribution.
The BDA hosted a follow-up conference call with the MSRB to discuss issues address in the comment letter such as: Whether non-dealer municipal advisors should make the official statement available to the managing or sole underwriter after the issuer approves it and have processes and automation made this portion of the rule unnecessary.
SEC Municipal Disclosures-Rule 15c2-12
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 Commissions interpretative guidance that was last updated in 1994.
Recently, the SEC adopted the Rule amendments and the BDA worked tirelessly with multiple committees to draft Q&A’s for OMS to consider. The questions address concerns with the interplay of the New Events and the 2010 Rule.
MSRB Rule for Municipal Advisors/Update Dealer Standards on Advertising
In 2018, the BDA was proactive in submitting comments to the MSRB as they issued guidance through draft sets of frequently asked questions (FAQs) and compliance resources to implement 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. MSRB Rule 40 and G-21 are set to be effective on February 7, 2019.
Specifically, in July 2018, the BDA submitted comments to the MSRB on their draft set of frequently asked questions (FAQs) related to Rule G-40 and a municipal advisor’s use of case studies and municipal advisory client lists.
In August 2018, the BDA submitted comments to their draft set of frequently asked questions (FAQs) related to the use of social media in advertising by municipal advisors and municipal securities dealers under Rule G-21 and Rule G-40. In October and December 2018, the BDA submitted comments a draft compliance resource regarding the application of the content standards under Rule G-40.
Last fall, 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 guidance and revised FAQs include some clarifications requested by the BDA in its comments in July 2018.
In addition to submitting written comments, BDA has been actively engaged with MSRB staff as they develop guidance to proposed Rule G-40 and amended Rule G-21.
Pennying and Best-Ex
In November of 2018, the BDA responded to an MSRB inquiry into the practice of pennying and how best-ex affected the practice. After multiple member and committee conference calls on the subject, BDA staff drafted a response to the MSRB and continued weekly follow up with the organization, including more discussion with BDA membership. Concerns were raised about the definition of pennying and how widespread the practice occurs. The BDA urged the MSRB not to place this into the realm of rule making, instead offer guidance on the practice.
The BDA hosted multiple conference calls with the MSRB and membership and anticipates another iteration of the original request for comment to be produced in early 2019.
2018 Legislative Accomplishments
Promoting Tax Exempt Municipal Bonds, Private-Activity Bonds and Municipal Advance Refundings Through Infrastructure
The BDA has been building relationships with various state and local groups, coalitions, and trade associations to continue to strengthen the coalition of advocates for the protection of tax-exempt municipal bonds, expanded use of private-activity bonds and reinstatement of municipal advance refundings.
In May 2018, the BDA Municipal Bond Division Leadership submitted comments to the House Ways and Tax Policy Means Subcommittee’s hearing titled, “Tax Reform and Small Businesses: Growing Our Economy and Creating Jobs,” requesting to restore the ability of state and local governments to save taxpayer dollars and generate additional funds for infrastructure and other key initiatives by restoring tax exempt advanced refundings.
The BDA lead the advocacy push for H.R. 5003, legislation that would fully reinstate municipal advance refundings. The BDA continues to meet with Members of Congress on both sides of the aisle that serve on Committees of jurisdiction, as well developing relationships with new Members of the House Municipal Finance Caucus to promote similar language as H.R. 5003.
The BDA is planning to build off the momentum created in 2018 by hosting a Congressional Roundtable and fly-in on March 12, 2019.
High Quality Liquid Assets
Working in tandem with state, local and issuer groups, the BDA advocated for and 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.
Municipal securities were classified as level 2B HQLA in S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, which was signed into law in May 2018.
While the BDA advocated that municipal bonds deserve the classification of level 2A liquid assets due to the long track record of safe investment, treatment of eligible municipal securities as level 2B, is a step in the right direction to continue leveling the playing field and making municipal bonds a more attractive investment.
Small Business Audit Correction Act
In June 2018, Senators Tom Cotton (R-AR) and Doug Jones (D-AL) and Representatives French Hill (R-AR) and Vicente Gonzalez (D-TX) formally introduced the Small Business Audit Correction Act (S. 3004 & H.R. 6021). The bill would exempt privately-held, small, non-custodial brokers and dealers in good standing from the requirements to hire a Public Company Accounting Oversight Board (PCAOB) registered audit firm to meet their annual SEA Rule 17a-5 reporting obligation to perform the audit in accordance with PCAOB standards. Passage of legislation would allow eligible firms to conduct their annual audits in a less costly and burdensome manner.
Through the BDA’s advocacy’s efforts, the Small Business Audit Correction Act steadily advanced in Congress throughout the year. In June 2018, the Senate Banking Committee favorably considered S. 3004 at their hearing titled, “Legislative Proposals to Increase Access to Capital.” In September 2018, the House Financial Services Committee marked-up and approved H.R. 6021 by a vote of 36-16.
In 2019, the BDA will actively meet with the new members of the Senate Banking and House Financial Services Committees to garner support for the bill, should it be re-introduced in the 116th Congress.
Michigan Legislation on Competitive vs. Negotiated Bond Sales
In June 2018 a bill was introduced in the Michigan State Legislature that would require municipal issuers to issue all outstanding debt through competitive bid, unless the issue is no more than $500,000, at which point negotiated is an option. The BDA’s Fixed Income Municipal Bond Committee has developed a strategy to fight against the anti-competitive nature of this bill and will engage in a grassroots effort to stop the legislation from moving forward before other states follow suit.
The BDA placed an op-ed in the BondBuyer in opposition of the legislation. The piece laid out the BDA’s argument in favor of allowing issuers the discretion of choice in what works best for them. Due in part to the BDA and membership advocacy, the bill has been pulled from the legislative calendar, and further action has been postponed indefinitely.
Municipal Bonds for America (MBFA)
The MBFA Coalition continued its efforts dedicated to preserving the tax exempt status of all municipal bonds, including private-activity bonds and the full reinstatement of advance refundings in 2018. Throughout the year, the Coalition engaged with Members of Congress and their staff on the outcomes of the Tax Cuts and Jobs Act, while interfacing with the White House on plans and proposals for municipal financing in a federal infrastructure package.
These efforts included hosting a reception for Members of Congress that supported the tax exemption during the debates on tax reform; hosting a post-tax reform webinar for Capitol Hill staff, trade groups, and issuers; hosting a webinar on the Administration’s infrastructure proposal; hosting the annual municipal bonds seminar, including the largest fly-in to date for the MBFA Coalition (visiting over 40 House and Senate offices); and, hosting a fundraiser for the new chairman of the House Ways and Means Committee (Rep. Richard Neal).
With over 100 new Members of Congress recently elected to the House of Representatives and Senate, the work of the MBFA is just beginning. The Coalition plans to have an even larger presence on Capitol Hill to educate, inform, and prepare Members and their staff for the debates to come on infrastructure (funding and financing), technical corrections to the Tax Cuts and Jobs Act, and the preservation of the tax-exemption.