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BDA Advocacy Agenda
Federal Policy Focus
Federal Policy Focus
The BDA’s Federal Policy Focus and Advocacy Accomplishments from 2022 and leading into 2023
Federal Regulatory Advocacy
BDA achieved several key successes in the regulatory arena in 2022. An issue-by-issue review of our activity follows.
Accelerating payments to corporate syndicate co-managers (FINRA Rule 11880)
We are pleased to report that for corporate bond underwriting transactions initiating in 2023, comanagers and other syndicate members will receive revenue from bookrunners significantly sooner than under current rules.
In November 2022 the SEC approved changes to FINRA Rule 11880 related to the time bookrunning managers must pay out syndicate revenue to syndicate members. Under current Rule 11880, bookrunners have 90 days from deal closing to pay syndicate members, a provision that has been in FINRA’s rulebook for nearly 40 years. Under changes approved by the SEC, bookrunners will need to pay out 70 percent of gross syndicate revenues within 30 days of deal closing and remaining revenue net of syndicate expenses within 90 days. Shortly after the SEC approved the Rule change, FINRA announced that the change would take effect “for public offerings of corporate debt securities that commence on or after January 1, 2023.”
The FINRA Rule change follows several years of BDA-led advocacy around this issue. BDA, together with a coalition of women-, minority-, and veteran-owned broker-dealers, approached SEC Chairman Gensler about this change shortly after he took office. Eventually, FINRA took up the project, and the result is a shorter settlement time for comanagers.
SEC Rule 15c2-11
On December 1, 2022, the SEC effectively extended 2022 relief for broker-dealers struggling to apply SEC Rule 15c2-11 to quotations for fixed income products. The relief, in the form of a staff no-action letter, specifies that staff will not recommend enforcement actions against firms for violating Rule 15c2-11 with respect to fixed income products if the firm determines that the security being quoted falls into one of several specified categories.
The no-action letter will be in effect through 2024 and supersedes previous guidance on 15c2-11 and fixed income.
The SEC’s action follows a series of events where the SEC determined that Rule 15c2-11, perceived for decades by the Commission and the industry to be a rule applicable to over-the-counter equities, also applies to quotations for fixed-income products except municipals and governments. The Rule requires traders, before publishing a quotation to a quotation medium, to review certain issuer financial disclosures and ensure that information is available publicly.
Throughout 2022 BDA remained in contact with SEC staff on Rule 15c2-11 implementation, emphasizing the significant, unresolved, compliance-related questions associated with applying what an equity-market rule to fixed income products. While the recent relief is welcome and responsive to BDA’s concerns, our long-term goal remains for the Commission to put the application of Rule 15c2-11 to fixed income through the normal rulemaking process.
BDA has also focused on providing a forum for firms to air and discuss compliance issues associated with Rule 15c2-11, co-hosting periodic member calls throughout the year. In addition, BDA hosted webinars with vendors who have implemented 15c2-11 fixed income compliance products.
FINRA Rule 4210
BDA’s long-standing campaign to address issues in FINRA’s Rule 4210 related to margining trades in new-issue agency MBS achieved progress in 2022. In January 2022 the SEC approved FINRA’s proposed changes to Rule 4210 known as the “CAT (covered agency transaction) Amendment”. They did so under “delegated authority” where the Commission delegates certain functions to division staff. That opened the door for BDA, together with BDA member Breen Capital, to file a petition for Commission review of the CAT Proposal. The SEC approved our petition, and the CAT Proposal is now under review by the commissioners themselves. While the commissioners review it, the proposal is stayed and does not take effect. There is no deadline for Commission action. Meanwhile, FINRA continued to extend the compliance deadline for most of the provisions in the version of Rule 4210 approved by the Commission in 2016. The current deadline is April 2023.
Rule 4210 is FINRA’s rule governing margin requirements. In a project originally initiated in 2015, FINRA is seeking to require dealers to collect margin on certain “extended settlement” transactions that do not clear within the T+2 window. This would include nearly all sales of new-issue agency MBS since those securities settle on a monthly schedule, not T+2. Under the 2016 version of the Rule still not implemented, dealers are required to collect maintenance margin on all new-issue agency MBS trades and additional variation margin when prices moved against the customer’s position. There is not option for a capital charge in lieu of margin.
The CAT Amendment now under SEC consideration would eliminate the maintenance margin requirement and would permit a dealer to take a capital charge in lieu of margin up to certain limits. While a margin improvement over the 2016 Rule, the CAT Amendment is still unworkable and risky for many firms active in the agency MBS market.
BDA will continue to press the SEC to direct FINRA to comport Rule 4210 to decades-long industry practice around settling new-issue agency MBS trades so that only trades that settle outside the “good settlement” window would require margin.
One-minute trade reporting
Both FINRA and the MSRB have issued companion proposals to shorten the time dealers have to report trades to FINRA’s TRACE and the MSRB’s RTRS systems from the current 15 minutes after execution to one minute. In our letter to the agencies, BDA said “We strongly oppose the Proposals. We urge the MSRB and FINRA to abandon these initiatives and allow the industry to continue to improve trade reporting times on its own as we have for 17 years.”
BDA’s opposition stems from concerns that while a significant majority of TRACE and RTRS trades do already get reported within one minute, a significant majority do not. The reasons for longer reporting times are well documented and legitimate. Focusing on the effects of the proposals on smaller dealers, BDA noted that effectively mandating firms to use automated trade order management systems would be cost-prohibitive for some smaller dealers and would drive some out of the fixed income trading business altogether. BDA told the agencies “Regulating firms out of business would be an unacceptable outcome of the Proposals.”
The public responses to the MSRB and FINRA proposals have been overwhelmingly negative. Staff of both agencies have informed us they are reaching out to individual firms to better understand the factors affecting trade reporting times. BDA will continue to press FINRA and the MSRB to abandon the proposals.
MSRB fee changes
The MSRB in 2022 proposed and implemented a new variable fee rate system for broker-dealers and municipal advisors. During the MSRB’s consideration of the changes, BDA used the proposal to address long-standing concerns over the relative contributions of dealers and municipal advisors to the MSRB’s revenue and over MSRB budgeting and priorities. “Of the revenue derived from regulated entities, 90 percent came from three fees imposed on BDs, underwriting assessment fees, transaction fees, and technology fees,” we told the MSRB in our comment letter.
Under the MSRB rule change, fee rates will vary from year to year based on the MSRB planned budget and projections of market activity. The purpose of the change is to help smooth MSRB revenue and avoid collecting too much revenue from the industry. BDA does not object to the fee proposal itself.
However, the fee proposal is the result of a comprehensive, Board-level review of the MSRB’s finances overall. BDA argued the Board should have used that opportunity to adjust fees to address the imbalance between fees imposed on dealers and MAs. “By no measure is this breakdown fair and reasonable,” we told the MSRB.
In our letter we also addressed the MSRB’s budget process, stating “the Board provides no practical way for stakeholders, especially BDs and MAs who are responsible for more than 90 percent of the MSRB’s revenue, to provide meaningful input on the budget.” We told the MSRB “the Board provides no practical way for stakeholders, especially BDs and MAs who are responsible for more than 90 percent of the MSRB’s revenue, to provide meaningful input on the budget” and we urged a more open budget process.
SEC Rule ATS
BDA submitted two comment letters to the SEC on their far-reaching proposal to amend Rule ATS. Rule ATS is the 1998 regulation governing alternative trading systems. The SEC has proposed to amend Rule ATS to eliminate the current exemption from registration for ATSs that support trading in government securities and to require Communication Protocol Systems (CPS), messaging systems which may connect buyers and sellers but generally do not support trade execution, to register as ATS. In BDA's first comment letter on the Rule ATS proposal we generally supported the headline provisions on the basis that entities that provide similar services should be regulated similarly.
Rule 15c2-11 is the SEC Rule requiring traders to review certain issuer information and disclosures before "publishing" a "quotation" to a "quotation medium." Before late last year the Rule was widely believed to apply only to OTC equities. Last year the SEC announced that Rule 15c2-11 also applies to quotations for fixed income products except municipals and governments. The SEC also published a no action letter that exempts some but not all fixed income products from Rule 15c2-11.
In our second comment letter, made possible by the SEC’s extending the comment letter period, BDA raised the issue that, based on previous SEC guidance, some have reasonably interpreted "quotation medium" to include all ATSs which are not Interdealer Quotation Systems (IDQS). That would include Communication Protocol Systems (“CPS”)—platforms which provide messaging and seller-buyer matching services but not trade execution—which would be treated as ATS under the proposal.
BDA wrote the SEC “One element of addressing 15c2-11 and fixed income for some firms will be to seek and provide liquidity through platforms which are not quotation mediums in order to avoid the expense and risk of complying with the Rule.” We also wrote “if all non-IDQS ATSs are quotation mediums as the Commission has previously suggested, the fallout from the decision to apply Rule 15c2-11 to fixed income would be even larger than we initially anticipated.”
SEC proposes sweeping best execution rule
On December 14, 2022, the SEC approved proposed new Rule Best Execution, a regulation which would establish a best execution standard for broker-dealers across all product categories, including fixed income, when transacting with non-institutional customers. The proposed rule would supplement, rather than replace, existing FINRA and MSRB best execution rules.
Under the proposal dealers “would be required to use reasonable diligence to ascertain the best market for the security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions.” The proposal would also “require broker-dealers to establish, maintain, and enforce written policies and procedures reasonably designed to comply with the best execution standard.” The Rule would not apply when “another broker-dealer is executing a customer order against the broker-dealer’s quotation.”
When engaged in “conflicted” transactions, dealers would be subject to additional best execution requirements. Conflicted transactions would include anywhere the dealer is a principal to the trade, including a riskless principal, among others. The proposal would exempt trades with “an institutional customer, exercising independent judgment, executes its order against the broker-dealer’s quotation.” The proposal does not define institutional customer but does request comment on whether and how the term should be defined. The proposal would exempt introducing brokers and includes other requirements and provisions.
BDA will comment on the SEC proposal after a thorough vetting with members. We anticipate this will be a priority issue for early 2023. The SEC proposal is available here.
Federal Legislative Advocacy
BDA achieved several key successes in the legislative arena in 2022. An issue-by-issue review of our activity follows.
Continued Protection of the Tax-Exemption
As the cornerstone of the BDA and the MBFA’s Capitol Hill advocacy, the protection of the tax-exempt status of municipal bonds remained a top priority in 2022. Partnering alongside the Public Finance Network, a coalition of key issuer and market advocacy groups led by the Government Finance Officers Association, the tax-exemption remains in a position of strength on the Hill.
Over the past year, the BDA and MBFA, working in concert with the PFN has worked to grow awareness and support on the Hill including growth of the House Municipal Bond Caucus. This bipartisan Congressional Caucus helps drive the narrative on Capitol Hill that munis are an important tool in infrastructure financing and Congress should work to embolden the tool while avoid any efforts to pare it back.
Support has also grown on the Republican side of the House Committee on Ways and Means—a historically hostile side of the Committee—including achieving co-sponsorship for key priorities such as the reinstatement advance refundings. As the House turns over to Republican control next year, we feel that the tax-exemption remains in a position of strength because of efforts such as these.
The BDA and MBFA have also worked to reestablish its presence (physically) on Capitol Hill following a multiyear virtual hiatus due to the COVID pandemic. The BDA held its first post-COVID fly-in this fall prior to the mid-term elections meeting with Senior staff on both the House and Senate side working to advance muni legislation. We plan to host DC events quarterly going forward as an opportunity for BDA membership to further their involvement in the advocacy process.
Lame Duck Spending Package
The BDA, along with our partners in the PFN have continued to work to advance key muni provisions during the Lame Duck session of Congress this winter.
Congress this spring passed a funding measure that will keep the government fully funded through late 2022, setting the stage for the additional spending bill. While odds for inclusion of key muni provisions into a lame duck bill are low, we are told on the Hill that this is a possible avenue, and it is being discussed.
These provisions include:
- The reinstatement of tax-exempt advance refundings;
- Raising the Bank Qualified Debt Limit from $10 to $30 million and tied to inflation; and
- Ensure that PAYGO is waived for direct pay bonds.
PAYGO and Direct Pay
Due to Congressional spending in the American Rescue Plan Act (ARPA), a Congressional budget control measure which was reenacted in 2010 has the potential to interrupt federal payments to issuers of a plethora of direct-pay bonds.
Statutory Pay as You Go, or PAYGO if not waived by legislative action at the end of the 2022 calendar year potentially could eliminate bond payments to a figure of upwards of 14 billion dollars, as well impact other headline grabbing discretionary spending programs such as Medicare, customs and border patrol, and farm support programs. It should be noted that in its current form enacted in 2010, no PAYGO cuts have occurred.
Specifically, unless new legislation is enacted that will waive PAYGO, these bond types are potentially impacted:
- Build America Bonds (BAB),
- Qualified School Construction Bonds (QSCB),
- Qualified Zone Academy Bonds (QZAB),
- New Clean Renewable Energy Bonds (New CREB), and
- Qualified Energy Conservation Bonds (QECB)
While not underestimating the concern, the likelihood of PAYGO not being waived remains low. While ARPA was a partisan package, precedent exists of a PAYGO waiver for a similarly partisan package, the Tax Cuts and Jobs Act. Thus, we fully expect Congress to take similar action. The most likely scenario for passage will be in a year end spending bill, or as a part of the ongoing appropriations process.
Financial Data Transparency Act
The BDA has advocated strongly against the Financial Data Transparency Act, a proposal pending in Congress to require municipal issuers to file financial disclosure documents such as annual financial statements in "machine-readable" format.
The proposal would effectively require the MSRB to establish formatting standards for issuer disclosure documents. Disclosures would have to be readable by software. This would involve developing a "taxonomy," a collection of data tags and definitions that would correspond to data items commonly found in issuer disclosure documents. Presumably, the system the MSRB developed would be compliant with extensible Markup Language (XML), the general standard for machine-readable documents on the Internet.
The BDA helped raise awareness of this issue in the industry by placing an op-ed in the Bond Buyer where we stated,
"Implementation of a machine-readable standard for municipal disclosures would be full of problems" and would be "expensive and likely unsuccessful." In our column we ask stakeholders to urge their senators "to abandon the machine readability provision applicable to municipal issuers."
The proposal passed the House as part of the National Defense Authorization Act (NDAA), however it has run into several political hurdles in the Senate, bringing into doubt the ability of Congress to pass the NDAA by years end.
The BDA has worked extensively with the Senate sponsors of the FDTA provision and has successfully advocated in support of key amendments that we believe will be inserted to the final legislation. These changes would place the new program in the SEC whereas as currently written would be run by the MSRB, thus resulting in Congressional appropriated funding of the new program taking the burden off broker-dealer fees. We also continue to emphasize the need for scaling with issuer size to ensure the burden is minimal across the spectrum of issuers.
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