A BDA led discussion with U.S. Senator John Boozman (R-AR) on the current state of Senate oversight on the bond market and general outlook for 2023

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U.S. Senator John Boozman (R-AR)

A fifth-generation Arkansan, John was raised in Fort Smith and graduated from Northside High School. He went on to play football for the University of Arkansas Razorbacks while completing his pre-optometry requirements. He graduated from the Southern College of Optometry in 1977 and entered private practice that same year co-founding a family business with his brother that would ultimately become a major provider of eye care to Northwest Arkansas.

Decades of experience as a successful healthcare provider and a small business owner guide John’s approach to governing. He is committed to advocating for economic policies that help Arkansas’s small businesses continue to grow and add jobs to our state’s economy. And since agriculture accounts for nearly one-quarter of Arkansas’s economic activity, John has been a consistent champion for our state’s farmers, ranchers and loggers and was instrumental in the fight for an equitable farm bill.

As the son of an Air Force Master Sergeant, John learned at an early age about the sacrifices of our men and women in uniform, as well as the unique challenges military families face. He brings these values with him to Washington where he is committed to enhancing the quality of life for both our veterans and their families.

John serves as the Ranking Member of the Committee on Agriculture, Nutrition and Forestry during the 117thCongress. This position enables him to play a key role in influencing policy that relates to the agriculture economy, nutrition programs and quality of life in rural America.

John will also continue to serve on the Committee on Appropriations, which is responsible for allocating federal funds, and the Committee on the Environment and Public Works, where much of the nation’s infrastructure policy is developed. First elected to the Senate in 2010, John was sworn in for a second term on January 3, 2017. Prior to serving in the Senate, he represented the people of the Third District of Arkansas in the U.S. House of Representatives.

Bond Dealers of America:

Senator Boozman, thank you for taking time for this Q&A as part of the BDA’s magazine, Fixed Income Insights. Could we start off with your background and how you bring those experiences to Washington to represent Arkansas in the US Senate?

Senator John Boozman:

I’m a fifth-generation Arkansan who is working to make our state a great place to live and work. I grew up in Fort Smith and played football under legendary Arkansas football coach Frank Broyles before attending optometry school at the Southern College of Optometry in Memphis. My brother and I started an eye clinic in Northwest Arkansas that has grown into a major provider for eye care in the area. I’ve been blessed to use my skills and training in ways that benefit others, including creating a low vision program at the Arkansas School for the Blind in Little Rock and helping meet eye care needs for people in Costa Rica and Haiti. I also had an interest in cattle ranching and raised Polled Hereford cattle earlier in life. Today, I’m using that experience and my familiarity with the vital role farming, ranching and forestry play in Arkansas’s economy to create agricultural policies that support the needs of our farmers and ranchers as the top Republican on the Senate Agriculture Committee. I’ve been honored to represent the people of Arkansas and bring my business, medical and agriculture expertise to Washington to help improve the lives of Natural State residents and citizens across the country.

BDA:

Earlier this year, you wrote Chairman Gensler alongside Senators Lummis and Tillis highlighting the harm that the proposed changes to FINRA Rule 4210 has the potential to harm regional broker-dealers, even so to the point of exiting the market fully. Have you heard back from the Chairman on this issue? Do you expect any opportunities in the future to bring the Chair to the Hill for a Senate hearing where additional questions could be asked?

JB:

Chairman Gensler’s official response to my office is that the letter “has been included as part of the comment file for this rulemaking.” He has not provided my office with an official response regarding the SEC’s authority to regulate margin on covered agency transactions (CATs) under FINRA Rule 4210, nor whether FINA has the authority to regulate credit in CATs. As to future hearings, I’m hopeful my colleagues on the Senate Appropriations Financial Services and General Government (FSGG) Subcommittee will be able to work together to bring the SEC Chair before the subcommittee. As my letter states, I’m concerned that the imposition of margin requirements will cause regional dealers to exit the Agency MBS market, which could negatively impact liquidity in the housing markets and increase the cost of loan origination and home financing. This is especially concerning given the current housing market and interest rate environment. To my knowledge Chairman Gensler hasn’t publicly answered whether the SEC has authority to regulate on the issue, which only further emphasizes the need for a public hearing – a sentiment with which I hope my colleagues on the subcommittee would agree.

BDA:

The current SEC administration has been very active in proposing new and far-reaching rulemaking initiatives on issues like climate risk disclosure, cybersecurity risk management, private fund advisors, alternative trading systems, ESG disclosures, SPACs, short position reporting, T+1 settlement, and pay versus performance, among others. Is Congress keeping up in terms of its oversight responsibility? Are you concerned the SEC is moving too far too fast on some issues?

JB:

Yes, I am concerned that the SEC is moving too fast and failing to provide adequate time for meaningful stakeholder input. Under Chairman Gensler the SEC has proposed several complicated and comprehensive rulemakings that would have significant impacts on individuals, institutional investors and capital markets. Despite the complexity of these proposals, the SEC has repeatedly provided the bare minimum of 30 days with respect to public comment periods, and I’m concerned the comment period length for some of the rulemakings on the SEC’s agenda fail to comply with the Administrative Procedure Act’s (APA) recommended comment period length. I’m also concerned the SEC may be undertaking a rulemaking process that fails to provide the whole landscape of stakeholders adequate opportunity to meaningfully comment, especially small businesses and retail investors. The SEC Spring 2022 Unified Agenda lists 53 rulemakings, a significantly larger agenda than peer financial regulators. In the first six months of 2022 alone, the SEC has published 20 notice of proposed rulemakings (NPRMs), which take up 1,627 pages in the Federal Register and pose thousands of questions for public comment. By proposing overlapping rulemakings and short comment periods, smaller market participants may lack the resources to analyze, consider, and comment on these proposals and identify possible unintended, negative consequences. The SEC further exacerbates this issue by failing to conduct robust cost-benefit analysis for each proposal, placing that burden on commenters. This is why I believe it’s important for the SEC to carefully measure the impact of each regulation on market participants and work closely with the Office of Advocate for Small Business Capital Formation and the Office of the Investor Advocate during the rulemaking process to incorporate their input and better understand their impact on small businesses and retail investors. Relatedly, I also think the SEC would enhance investor protection by publicly disclosing on the agency’s website all economic analysis performed by staff for a given rulemaking, including the analysis performed by the Division of Economic and Risk Analysis (DERA). A public file including all data analyzed, assumptions made, methods utilized and results concluded for each SEC rulemaking would provide market participants a clearer understanding of both regulatory requirements and the analysis and reasoning that shaped those requirements.

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BDA:

In 2021 the SEC announced for the first time in the 50-year history of the Rule that SEC Rule 15c2-11 now applies to quotations in fixed-income products ex municipal and government securities. Since then the SEC has offered little guidance as to how specifically bond dealers should comply. Is there any hope that the SEC might consider effecting a change like this through the normal rulemaking process rather than through a staff no-action letter?

JB:

I’m concerned that despite limited application to fixed income markets and the equity-focused intent of Rule 15c2-11, SEC staff, through the no-action process and absent a formal rulemaking, began applying the rule to fixed income securities. This is a substantial change in regulatory policy without going through the APA-required rulemaking process, and I hope the SEC will reconsider the issue through the notice-and-comment rulemaking process. Given the potential consequences to the fixed income markets, should the SEC forgo reconsideration through the normal rulemaking process, I would hope that either the Government Accountability Office (GAO) or the SEC Office of Inspector General (IG) would consider studying what went into the SEC staff decision that led to the issuance of the no-action letter, including the decision to use the no-action process in lieu of formal rulemaking to apply Rule 15c2-11 to fixed income securities such as 144A debt securities. The SEC’s decision could severely impact liquidity in the fixed income markets, and I believe market participants and Congress should have some insight into its decision to make such a sweeping change without going through the public rulemaking process.

BDA:

Looking ahead to the next Congress, with the likelihood of a divided Congress, do you expect an increase in oversight of key regulatory bodies such as the SEC? And how will that potentially impact fixed income issues such as FINRA Rule 4210 and SEC 15c2-11

JB:

If Republicans take either or both chambers, we will see an increase in congressional oversight over regulatory agencies from both authorizing and appropriations committees. This will likely occur in the form of more congressional hearings and requiring Chairman Gensler to publicly answer questions on various policy issues. I also think we will see an increase in legislation – both authorizing and funding – aimed at a variety of specific rulemakings and broader policy issues, such as including extending comment periods and increasing transparency around cost-benefit analysis. As to FINRA Rule 4210 and SEC Rule 15c2-11, enhanced congressional oversight may cause the SEC to act on these specific issues. We also may see specific legislation aimed at those issues, and I would encourage interested parties to continue reaching out to their elected officials about the impact of these proposals.

BDA:

As you sit on the Environment and Public Works Committee. Has leadership expressed any interest in addressing more infrastructure issues? Do you think that key bipartisan muni priorities such as the reinstatement of tax exempt advance refundings or a new direct pay bond could receive consideration in the next Congress regardless of who is Chair?

JB:

One of our biggest infrastructure priorities this Congress is passing the Water Resources and Development Act (WRDA) bill, as efficient and safe transportation is vital to economic growth and development. WRDA provides a list of projects to improve waterways, navigation, flood control, hydropower, recreation and water supply projects conducted by the U.S. Army Corps of Engineers. Currently, the Senate and House committees have been working hard to write an effective, bipartisan product. I am confident WRDA will be brought to the floor soon, and have the necessary support for passage. The reinstatement of tax exempt advance refunding or a new direct pay bond is something the committee is considering and I’m hopeful that we advance bipartisan solutions like these.